The original tax benefit of a REIT is the single-taxation of earnings. REITs are passthrough entities, which means they don’t pay a corporate income tax as long as they adhere to strict rules. This is great for investors because it means they’ll keep more of their investment earnings. 

Here’s how the flow of money and taxes works for a corporation vs a REIT. Then we’ll walk through an example to show how powerful this can be. 

  1. A corporation earns money from selling its products or services. 
  2. The corporation pays corporate income tax to the federal government. 
  3. If they have extra earnings AND they want to distribute them, they return the money to investors as dividends. 
  4. Investors report the dividends and pay income tax to the federal government. 

REITs work the same way, but they cut out step #2. REITs don’t pay the corporate income tax. For a REIT, the flow goes like this: 

  1. A REIT earns money from owning, operating, or financing real property. 
  2. The REIT pays its earnings to investors in the form of dividends. 
  3. Investors report the dividends and pay income tax to the federal government. 

In both situations, the individual investor needs to pay income taxes. But with a REIT, the earnings are only taxed once, when the individual pays the taxes. This provides a clear benefit over the first example, where the corporation AND the individual had to pay income taxes. 

Here’s an example that will demonstrate how this works.  

Let’s assume a corporation and a REIT each make $1,000 in profit. Now let’s track through the taxes to see how much money the investors get to keep after paying all tax obligations. 

Regular Corporations and Taxes

The corporation pays the 21% corporate income tax on the earnings. The company pays $210 in taxes (21% * 1,000 = $210) and the company now has $790 in profit after taxes. 

The company distributes all of the profit to investors as dividends. Dividends are taxed as ordinary income, the same way hourly or salary income is taxed. Let’s assume that the investors are all in the 24% tax bracket. 

The investors pay $189.60 of income taxes on the $790 they receive from the company. (24% * $790 = $189.60). Now the investors have $600.40 left ($790 – $189.60 = $600.40). 

After it’s all said and done, the stock investors have $600.40 left from the $1,000 in corporate earnings. They’ve kept 60.04% of the profits and paid the other 39.96% in taxes between the corporate and individual levels. 

REITs and Taxes

Let’s walk through the same situation, but the income comes from a REIT instead of a corporation. 

The REIT pays $0 on the $1,000 of profit they made by investing in real estate. 

Now the REIT distributes $1,000 to the investors as dividends. Again, let’s assume that the investors are in the 24% tax bracket. 

Now the investors pay $240 of income taxes on the $1,000 they received from the REIT (24% * 1,000 = $240). Now the investors have $760 left after taxes. ($1,000 – $240 = $760). 

Now the investors have kept $760 of the $1,000 in REIT earnings. They’ve kept 76% of the profits and paid the other 24% in taxes at the individual level. 


Both the REIT and the corporation had $1,000 in profit. But the investors, the owners of the company and the REIT, had different outcomes after paying all of their taxes. 

The investor had $600.40 left from his investment in the corporation and $760 left from his investment in the REIT. That’s nearly 27% more left in your pocket with the REIT! 

This is the power of single taxation from passthrough entities compared to corporate entities. Passthrough entities, like Arrived, don’t pay any corporate income tax. Investors receive more money and are better off after paying their income taxes. 

Real estate investments are valued for their cash flow. Compared to stock investments, real estate investments have better tax treatment because of the difference between single and double taxation.

Disclaimer: This is a simple example meant to illustrate the concept of single taxation vs double taxation. This does not constitute legal advice, please talk to your tax professional to understand the tax implications for yourself. 

Sign up below to Arrived Homes to start your journey into real estate investing and receive the benefits of a REIT and single taxation.

You May Also Like