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The 90% Distribution Rule

Every REIT must distribute at least 90% of its taxable income to shareholders each year, which is why REIT dividends run high

The rule in plain terms

To qualify for REIT tax treatment, a company must distribute at least 90% of its REIT taxable income to shareholders every year, in the form of dividends. This is the single most defining rule in the REIT structure, and it is why REITs, as a group, pay out a much larger share of their earnings than the typical public company.

The requirement applies to REIT taxable income specifically, a figure calculated under tax rules rather than ordinary accounting rules, and it resets every year: a REIT cannot average distributions across multiple years to make up a shortfall.

Why it exists

The 90% requirement is the trade-off at the heart of the REIT structure. In exchange for distributing the bulk of its income, a REIT generally does not pay federal corporate income tax on the portion it distributes, avoiding the "double taxation" that a regular corporation faces, where the company pays corporate tax and shareholders are then taxed again on dividends. The rule ensures that tax benefit flows through to shareholders as actual cash rather than being retained inside the company.

Congress designed the rule this way so that the tax advantage would benefit the many investors who own REIT shares, rather than accumulating inside a company that might use it for unrelated purposes. In effect, the REIT acts as a conduit, passing real estate income through to shareholders with only one layer of tax along the way. The threshold was not always 90%. It was originally set at 95% and lowered to 90% by the REIT Modernization Act, effective in 2001, see The History of REITs for that full timeline.

Taxable income isn't the same as cash flow

One source of confusion: "REIT taxable income" is a tax accounting figure, not the same thing as cash flow or the accounting net income reported in financial statements. Real estate generates large non-cash depreciation expenses, which reduce taxable income, and can even push it negative in accounting terms, without reducing the actual cash a REIT collects in rent. That is part of why many REITs pay dividends that look large relative to accounting net income, and why analysts often look at cash-flow-based measures like funds from operations instead — see FFO Explained.

It is also why a portion of a REIT dividend can be classified as a return of capital rather than ordinary income, for tax purposes, even when the REIT's underlying cash flow comfortably covered the payment. This is also why comparing a REIT's dividend to its accounting net income, the way you might for an ordinary company, often produces a misleadingly low or even negative payout ratio. Metrics built specifically for REITs exist precisely to correct for this.

What happens if a REIT falls short

Missing the 90% threshold can jeopardize a company's REIT status, though the tax code includes certain provisions that allow a REIT to correct a shortfall under specific conditions rather than losing its status outright. Separately, there is an incentive to go beyond the bare minimum: REITs that do not distribute close to 100% of their taxable income, following a specific formula that includes both ordinary income and capital gains, can owe an additional excise tax on the undistributed amount. In practice, this is why many REITs target payouts at or above 100% of taxable income rather than sitting right at the 90% floor.

These provisions exist because real estate income can be lumpy from year to year — a large property sale or a one-time accounting adjustment can shift taxable income in ways that are hard to predict precisely in advance, so the tax code allows some room to true things up rather than punishing every technical miss severely.

Why this makes REIT dividends distinctive

The distribution requirement is a big part of why REITs, as a group, tend to offer higher dividend yields than the broader stock market — see Dividend Yield Explained for how that figure is calculated. It is also why REITs typically fund new acquisitions and development with fresh capital, new shares or debt, rather than retained earnings, since so little income stays inside the company. That trade-off is explored in How REITs Work. This is also one reason REITs are frequently discussed alongside other income-focused investments such as bonds or dividend-paying stocks, even though the underlying businesses work very differently.

None of this makes a REIT dividend guaranteed. Like any company, a REIT can reduce its dividend if income falls, and the 90% rule only sets a floor on the percentage of taxable income paid out — it does not require the dollar amount to stay the same from year to year.

How this shows up for shareholders

For an individual shareholder, the practical result is a dividend that arrives on a regular schedule and that may be split, for tax purposes, across ordinary income, capital gains, and return of capital, covered in How REIT Dividends Are Taxed. Because the required distribution is based on taxable income rather than cash flow, the dollar amount of a REIT's dividend can also change from one year to the next as taxable income itself changes, even when the underlying real estate portfolio is performing steadily.

You can track upcoming payment dates for specific REITs on the ex-dividend calendar, and look up any unfamiliar term in the glossary.

See it in the data: See upcoming ex-dividend dates →

Research and education only — nothing here is investment advice. Figures such as the 90% distribution rule are general and can change; always confirm against a company's filings.