Why does a company need to pay 90% of its income as dividends to qualify as a REIT?

Question

I came across this page on Investopedia that says that according to the US tax code, to qualify as a REIT, a company must pay a minimum of 90% of taxable income in the form of shareholder dividends each year.

What economic arguments, if any, would be in favor of this definition? What are the benefits of requiring such companies to pay 90% dividends instead of (say, for example) reinvesting in new construction?

[This is my first question on this specific SE site; would re-edit and correct the question as needed].

Answer 1

Taxation:

The SEC states that; "A company that qualifies as a REIT is allowed to deduct from its corporate taxable income all of the dividends that it pays out to its shareholders. Because of this special tax treatment, most REITs pay out at least 100 percent of their taxable income to their shareholders and, therefore, owe no corporate tax."

The effect is that a REIT can pass on their tax burden to shareholders rather than pay federal taxes themselves, although a REIT is an entity that would be taxed as a corporation were it not for its special REIT status. This pass-through simplifies and reduces tax treatment as morningstar explains: "tax issues for REIT investors are fairly straightforward. Each year, REITs send Form 1099-DIV to their shareholders, containing a breakdown of the dividend distributions. For tax purposes, dividends are allocated to ordinary income, capital gains, and return of capital. As REITs do not pay taxes at the corporate level, investors are taxed at their individual tax rate for the ordinary income portion of the dividend."

If it would not be a pass through business, it would pay corporate tax on its profits. If it pays dividends, those would be taxed again on the shareholders level.

Answer 2

I believe it has something to do with the fact that dispersing profits as dividends more realistically replicates owning property—where you would receive “dividends” in the form of rent cash flows from the property’s tenants.