If you do hold it in taxable, the return of capital distributions are not taxed. They actually reduce your basis in the original shares.
This is an important point & is a part of why I think that individual REITs are best held in taxable accounts. REITs generally throw off enough depreciation to shield the much of the REIT's distributions from taxation. Assuming that the REIT does make "return of capital" distributions, you may end up with a tax basis of 0, which means that you would pay capital gains tax on 100% of the sale price whenever you divest of the shares.
The other reason that I think individual REITs should be held in taxable accounts is the rule on Unrelated Business Taxable Income. If a REIT generates more than a certain threshold of gross income in a given year (maybe $1,000?), then you will actually have to pay current-year income tax, regardless of the REIT being held in a tax-advantaged account.
Investing in a REIT index eliminates both of the rationale I cite above. It is the simplest, most diversified approach. If you are interested in the overall asset class & not a certain group of asset / real estate managers, I think it is really the best way to go.