What is one of the primary advantages of Real Estate Investment Trusts (REITs) regarding taxation?

One of the primary advantages of Real Estate Investment Trusts (REITs) regarding taxation is that they avoid double taxation by passing income to shareholders. This mechanism allows REITs to distribute at least 90% of their taxable income to shareholders in the form of dividends. As a result, the REIT itself does not pay federal income tax on the income that is passed through to its investors. This structure is significant because it ensures that the income generated from real estate investments is only taxed at the shareholder level, preventing the same income from being taxed both at the corporate level and again when dividends are distributed to shareholders.

This tax efficiency is one of the key attractions for investors looking for income-generating investments in real estate while maintaining favorable tax treatment. Other options like corporate taxation or being fully exempt from taxes do not accurately reflect the taxation framework for REITs, helping to clarify why the correct answer focuses on the avoidance of double taxation.