What type of distributions come from mutual funds and real estate investment trusts (REITs)?

Mutual funds and real estate investment trusts (REITs) often distribute shares of their profits to shareholders in the form of capital gain distributions. These distributions occur when the fund or trust sells an asset for more than its purchase price, resulting in a profit or gain. The capital gains can arise from various sources, such as the sale of securities within the mutual fund or from the sale of properties in the case of REITs.

Both mutual funds and REITs are required to distribute a significant portion of their income to avoid taxation at the entity level. While they may also provide dividends or other types of distributions, capital gain distributions are specifically related to profits from the sale of investments or properties. This makes them a critical component of the annual returns for investors in these vehicles, reflecting the growth and successful management of the underlying assets.