The Basics of REIT Taxation

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REIT dividends are mostly not qualified dividends. Because a real estate investment trust generally pays no corporate income tax on the earnings it distributes, the bulk of its payout is taxed as ordinary income at your marginal rate, not at the 0%, 15% or 20% rates that apply to qualified dividends. REIT investors get two offsets. Ordinary REIT dividends usually qualify for a 20% deduction under Section 199A. Parts of a distribution may also be labeled as capital gains or as a return of capital, and each of those labels is taxed differently.

Why REITs Usually Don’t Pay Corporate Tax

A REIT is a corporation (or a trust taxed like one) that would face normal corporate income tax if it did not elect and keep REIT status.

To keep that status, a REIT has to meet several ongoing tests:

• Asset test: at least 75% of total assets must be real estate, cash or government securities.
• Income test: at least 75% of gross income must come from real estate sources such as rents and mortgage interest.
• Distribution test: at least 90% of taxable income must be paid to shareholders as dividends.
• Ownership tests: the REIT needs at least 100 shareholders, and five or fewer individuals cannot own more than 50% of its shares.

The REIT deducts the dividends it pays, so income distributed to shareholders is taxed once, in the shareholders’ hands. Shareholders who reinvest dividends through a dividend reinvestment plan still owe tax on them in the year they are paid. Income the REIT retains is taxed at the corporate level. A REIT can also keep long-term capital gains and pay tax on them. In that case shareholders report their share of the gain on their own returns and claim a credit for the tax the REIT paid, using information the REIT provides on Form 2439.

Do REITs pass through losses?

No. A partnership sends each owner a Schedule K-1 that can carry losses and depreciation onto the owner’s return, but a REIT is a corporation for tax purposes. A net operating loss stays at the REIT level and can offset the REIT’s own future income. Shareholders receive Form 1099-DIV, not a K-1, and cannot deduct the REIT’s losses. Depreciation reaches investors only indirectly, through return-of-capital distributions, as explained below.

Are REIT Dividends Qualified?

Qualified dividend rates exist partly because a regular corporation has already paid tax on the profits behind its dividends. A REIT generally has not, so the tax code treats most of its ordinary dividends as nonqualified. On Form 1099-DIV, they appear in box 1a (total ordinary dividends) but not in box 1b (qualified dividends).

A REIT can report part of a distribution as qualified in two situations:

1. The REIT received qualified dividends of its own, for example from a taxable REIT subsidiary or other regular corporation it owns.
2. The REIT paid corporate tax on income, such as income it retained in a prior year, and then distributed it.

Only the amount the REIT reports in box 1b gets qualified dividend rates. The same rules apply to mortgage REITs. Their income is largely interest from mortgages and mortgage-backed securities, but it reaches you as an ordinary REIT dividend, not as interest and not as a qualified dividend.

How a REIT Distribution Is Taxed

A single REIT payment can contain several pieces with different tax treatment. The REIT reports the breakdown after year-end on Form 1099-DIV. The per-share amounts you saw announced during the year do not show how the money will be taxed.

Ordinary dividends and the Section 199A deduction

The largest piece is usually ordinary income from the REIT’s rental or lending business, taxed at your marginal income tax rate. The Tax Cuts and Jobs Act of 2017 created a deduction of up to 20% for qualified business income from pass-through businesses, including qualified REIT dividends. The One Big Beautiful Bill Act of 2025 extended that deduction beyond its original expiration.

Several features matter for REIT investors:

• The REIT reports the eligible amount in box 5 of Form 1099-DIV (Section 199A dividends).
• The deduction lowers taxable income, not adjusted gross income. You can take it whether you itemize or claim the standard deduction.
• The wage and property limits that restrict the deduction for some business owners do not apply to qualified REIT dividends.
• You must hold the shares for more than 45 days during the 91-day period that begins 45 days before the ex-dividend date. Shares bought just before a payout and sold right after do not qualify.

The effect on the top bracket: 37% × (1 − 0.20) = 29.6%. That is below the ordinary rate but still well above the 20% maximum on qualified dividends.

Capital gain distributions

When a REIT sells property it has held for more than a year, it can designate part of its dividend as a capital gain dividend (box 2a). You pay long-term capital gains rates of 0%, 15% or 20% based on your taxable income for the year. This applies even if you have owned the REIT shares for only a few months. One portion can carry a higher rate. Gain attributable to depreciation previously taken on real property is “unrecaptured Section 1250 gain” (box 2b), taxed at a maximum of 25%.

Non-dividend distributions (return of capital)

A REIT’s cash flow often exceeds its taxable earnings because depreciation is a large non-cash expense. When distributions exceed the REIT’s earnings and profits, the excess is a non-dividend distribution, reported in box 3. It works differently from the other pieces:

• It is not taxed in the year you receive it.
• It reduces your cost basis in the shares by the same amount.
• The lower basis increases your gain (or shrinks your loss) when you sell, so the tax is deferred, not eliminated.
• If your basis reaches zero, any further non-dividend distributions are taxed as capital gains. They are short-term or long-term depending on how long you have held the shares.

Net investment income tax

Higher earners may owe the 3.8% net investment income tax on REIT dividends and gains. It applies when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. Those thresholds are set in law and not indexed for inflation. At the top bracket, qualified REIT dividends can therefore face a combined federal rate of 29.6% + 3.8% = 33.4%.

Example: Taxing One Year of REIT Distributions

This is a hypothetical example, not any real REIT’s figures. An investor buys 100 shares at $20, for a $2,000 cost basis, in a taxable account and holds them for more than 45 days around each ex-dividend date. The REIT earns $2 per share and distributes $1.80. Its year-end 1099-DIV classifies $1.20 per share as an ordinary (Section 199A) dividend and $0.60 as a non-dividend distribution. The investor is in a 24% bracket and below the net investment income tax threshold.

• Ordinary dividend: 100 × $1.20 = $120.
• Section 199A deduction: 20% × $120 = $24, leaving $96 taxable.
• Federal tax: $96 × 24% = $23.04, an effective 19.2% on the $120.
• Return of capital: 100 × $0.60 = $60, not taxed this year. Basis falls from $2,000 to $1,940 ($19.40 per share).

Two years later, the investor sells all 100 shares at $22, for $2,200. The long-term capital gain is $2,200 − $1,940 = $260, so the $60 that was not taxed as a dividend is now taxed at the lower long-term rate. Under the holding period rules for capital gains, a sale within a year would put the entire gain at ordinary rates.

Selling REIT Shares

A sale of REIT shares is taxed like any stock sale: proceeds minus adjusted basis. Because every return of capital lowers basis, the figure on your original purchase confirmation is usually out of date after a year or two. Brokers typically track this for covered shares. If you transferred shares between brokers or hold old positions, compare the broker’s figure with your own records of box 3 amounts.

REITs in Tax-Advantaged Accounts

Because most REIT income is taxed at ordinary rates, the account you hold REITs in matters. Inside a traditional IRA or 401(k), dividends, capital gain distributions and returns of capital are not taxed when paid. Withdrawals are taxed as ordinary income, whatever the source inside the account. In a Roth IRA, qualified withdrawals are tax-free. The trade-off is that the 199A deduction and long-term capital gains rates go unused inside these accounts, and basis tracking stops mattering.

REIT ETFs and Mutual Funds

A REIT ETF or mutual fund owns shares of many REITs and passes the character of their income through to you. Your 1099-DIV is still split into ordinary dividends, Section 199A dividends, capital gain distributions and possibly return of capital. A fund can also generate its own capital gain distributions when it sells REIT shares at a profit.

Non-U.S. Investors

Nonresident aliens generally face 30% U.S. withholding on ordinary REIT dividends, which a tax treaty between the U.S. and their country of residence may reduce. Claiming treaty benefits typically requires giving the broker Form W-8BEN. Capital gain distributions follow separate withholding rules for foreign investors. The home country may also tax the same income, often with a credit for U.S. tax withheld.

FAQs

The Bottom Line

REIT owners in taxable accounts should expect most payouts to be taxed as ordinary income, softened by the Section 199A deduction and by return-of-capital portions that defer tax until a sale. Reading the year-end Form 1099-DIV and keeping basis records current keeps your reported gains accurate. Holding REITs in an IRA or 401(k) avoids yearly tax on distributions but gives up the 199A deduction and long-term capital gains rates.