How is REIT income taxed?
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.
If you own REITs in an IRA, you won't have to worry about dividend taxes each year, nor will you have to pay taxes in the year in which you sell a REIT at a profit. In a traditional IRA, you won't owe any taxes until you withdraw money from the account.
An investor earns $1000 in dividends from a REIT. At a 15% qualified dividend tax rate, the investor will pay $150 in taxes. Capital gains distributions do not qualify as a qualified dividend.
Generally, a REIT must file its income tax return by the 15th day of the 4th month after the end of its tax year.
Typically, REIT dividends are taxed individually as ordinary income, but you can avoid the tax burden if your investment grows within a Roth IRA. Investment earnings are tax-free in a Roth IRA – including REIT dividends — so you may end up keeping significantly more of your earnings than you would with a REIT alone.
Although REITs trade on exchanges like stocks, the tax structure for these investments can be much different. For a basic guide on REITs, be sure to check out The Definitive Guide to Real Estate Investment Trusts.
REITs and REIT Funds
Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.
A REIT is merely a tax classification that allows an entity that would otherwise be taxed as a corporation to avoid “double taxation” and achieve tax treatment similar to – but in some important ways, different than – a tax partnership.
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
Where do I report REIT income on tax return?
REIT dividends and capital gains are reported on your personal tax return. Specifically: Ordinary REIT dividends are reported on Form 1040, line 3b. These are included in your total ordinary dividends for the year.
The REIT's ownership (which must be proven by transferable shares or by transferable certificates of beneficial interest) must be held by at least 100 shareholders for at least 335 days of a 365-day calendar year (or equivalent thereof for a short tax year) for the second taxable year and beyond.
A REIT must be a U.S. entity taxable as a corporation (I.R.C. section 856(a)) so the REIT is an "exempt recipient" not reported on Forms 1099.
REITs are excellent candidates for retirement account investments. The tax-advantaged nature of retirement accounts can magnify the already tax-advantaged nature of REITs, which can result in some powerful long-term return potential.
To meet the definition of a REIT, the bulk of its assets and income must come from real estate. In addition, it must pay 90% of its taxable income to shareholders. This requirement means REITs typically don't pay corporate income taxes, though any retained earnings would be taxed at the corporate level.
Benefits of investing in REITs include tax advantages, tangibility of assets, and relative liquidity compared to owning physical properties. Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
Unlike many companies however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.
REITs, therefore, have the potential to be relatively tax-efficient investments because of their ability to use ROC distributions to both defer taxes and potentially reduce them to the typically lower capital gain rate.
A REIT is a trust that owns real estate like office spaces, malls, etc., and earns rental income from them and distributes it to the unitholders in the form of dividends. These are like mutual funds but invest in real estate instead of equity, debt, etc. So, it is a passive way of investing in real estate.
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Where is the best place to hold a REIT?
Then you'll be able to buy and sell publicly traded REITs just as you would any other stock. Because REITs pay such large dividends, it can be smart to keep them inside a tax-advantaged account like an IRA, so you defer paying taxes on the distributions.
If you own shares in a REIT, you should receive a copy of IRS Form 1099-DIV each year. This tells you how much you received in dividends and what kind of dividends they were: Ordinary income dividends are reported in Box 1. Qualified dividends in Box 1b.
For each tax year, the REIT must derive: at least 75 percent of its gross income from real property-related sources; and. at least 95 percent of its gross income from real property-related sources, dividends, interest, securities, and certain mineral royalty income.
With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts. However, REIT stocks are only as good as the properties they own — and some real estate sectors may be better positioned than others.
Answer: First, if a REIT pays out more than 100% of its taxable income, then a portion of the dividend in excess of taxable income is considered a return of capital. The return of capital component is not taxed in the year it is received, but rather is taxed when the REIT shares are sold.
