What investment vehicle allows joint ventures to purchase real estate and avoids double taxation?

Real Estate Investment Trusts (REITs) are a specific type of investment vehicle designed to enable joint ventures to invest in real estate while also providing significant tax advantages, particularly the avoidance of double taxation.

A REIT operates by pooling the capital of numerous investors to purchase and manage income-producing real estate or real estate-related assets. Importantly, REITs are structured to pass through income to shareholders, which means they do not pay corporate income tax at the federal level as long as they distribute at least 90% of their taxable income in the form of dividends. This distribution requirement allows investors to receive income directly, thereby avoiding the double taxation that typically occurs when corporate profits are taxed before being distributed to shareholders.

This unique structure encourages investment in real estate and provides investors with a means of gaining exposure to the real estate market without the complications of direct ownership. In contrast, mutual funds and exchange-traded funds (ETFs) primarily focus on equity or fixed income markets and do not cater specifically to real estate investments like REITs do. Income-producing properties refer to individual real estate assets rather than an organized investment vehicle like a REIT, which significantly amplifies the potential for broader investment through pooled resources.