How REITs Are Structured. There are many ways to structure a REIT. In general, property owners own assets and they're looking to minimize the tax that occurs on capital gains when they sell. A REIT is formed as an operating partnership for the purpose of collecting and operating the assets. In most cases, the REIT does not actually own the assets. Shares in the operating partnership are owned by both the REITs and the property contributors who contribute the property to the REIT. This is sometimes referred to as an UpREIT. The property owners contribute assets and receive units in the operating company, thereby avoiding the tax of an outright sale. Investors and financiers are needed to fund the REIT with cash to allow it to acquire a controlling stake in the buildings or assets. The equity investors then own shares in the REIT. The debt holders are creditors of the REIT. The REIT manages the operating partnership, which is where all the business is transacted, namely collecting rents, servicing and maintaining the property, et cetera. The shareholders receive dividends which are passed through from the operating partnership without being taxed. The dividends will eventually be taxed at the investor level. How the pass-through works. In general, real estate properties generate net profits at the operating level. The pass-through structure of a REIT allows the corporate entity to avoid paying taxes if a high percentage of net profits is paid out to its owners. This is different from a traditional corporation where a high dividend payout does not act as a tax shield. REIT dividends are non-qualified, which means that they're taxed as ordinary income, unlike traditional corporate dividends, which are qualified in tax that lower capital gains rates. This might seem to give corporate dividends an advantage over REITs, but not really. REITs can actually structure their dividends so that a portion is paid out as capital gains or a return of capital, and those payments are taxed at lower levels. Both equity shareholders and Op Unit Holders can receive dividends in a traditional REIT structure.