Taxation & Accounting

90% REIT Distribution Rule (IRS Tax Exemption) Explained

Quick Definition

90% REIT Distribution Rule (IRS Tax Exemption): The 90% REIT Distribution Rule is a US federal statutory requirement under Internal Revenue Code Section 857 requiring a REIT to distribute at least 90% of its taxable income to shareholders annually as dividends to maintain corporate tax-exempt status.

Institutional Analysis & Context

By satisfying the 90% rule, REITs deduct dividend distributions from taxable income, effectively paying zero corporate income taxes at the entity level. This eliminates the 'double taxation' of typical C-corporations. In exchange, shareholders pay income tax on the distributions at their individual rates.

Formula & Calculation Breakdown

Annual Dividend Requirement = Taxable Real Estate Income × 90% (or greater)

Metric Component	Definition & Application
Taxable Real Estate Income	Net taxable income after operating expenses and allowable deductions
Dividends Paid Deduction	IRC deduction shielding corporate income from entity-level tax

Real-World Calculation Example

A shopping center REIT reports $100M of federal taxable income. To maintain its REIT status, it must distribute at least $90M in cash dividends to shareholders during the tax year.

Flagship REITs Exemplifying This Metric

Analyze how top public REITs perform across this dimension in the live market:

O Profile →SPG Profile →FRT Profile →KIM Profile →VICI Profile →

Frequently Asked Questions

What happens if a REIT distributes less than 90%?

It loses its REIT tax-exempt classification and becomes taxed as a regular C-corporation, triggering substantial corporate back-taxes and penalties.

Why do many REITs distribute 100% of taxable income?

Distributing 100% reduces the REIT's entity-level corporate tax obligation to exactly zero dollars.

Does the 90% rule apply to FFO or taxable net income?

The rule applies strictly to IRS federal taxable income, NOT non-GAAP FFO or AFFO.