After the 20% qualifying business income deduction is applied to those distributions, most REIT ETF dividends will be taxed at your regular income tax rate. Some REIT ETF earnings may be subject to capital gains tax, which will be reported on Form 1099-DIV.
Is a REIT ETF taxed in the same way as a REIT?
- Companies that own and operate real estate in order to develop and generate income are known as real estate investment trusts (REITs).
- Equity REIT securities and other derivatives are the primary investments of REIT exchange-traded funds.
- Equity REITs, mortgage REITs, and hybrid REITs are the three types of REITs.
- REITs are exempt from paying income taxes if they follow specific federal laws.
- REIT ETFs are passively managed indices of publicly listed real estate companies.
How does REIT income get taxed?
Dividend payments are assigned to ordinary income, capital gains, and return of capital for tax reasons for REITs, each of which may be taxed at a different rate. Early in the year, all public firms, including REITs, must furnish shareholders with information indicating how the prior year’s dividends should be allocated for tax purposes. The Industry Data section contains a historical record of the allocation of REIT distributions between regular income, return of capital, and capital gains.
The majority of REIT dividends are taxed as ordinary income up to a maximum rate of 37% (returning to 39.6% in 2026), plus a 3.8 percent surtax on investment income. Through December 31, 2025, taxpayers can deduct 20% of their combined qualifying business income, which includes Qualified REIT Dividends. When the 20% deduction is taken into account, the highest effective tax rate on Qualified REIT Dividends is normally 29.6%.
REIT dividends, on the other hand, will be taxed at a lower rate in the following situations:
- When a REIT makes a capital gains distribution (tax rate of up to 20% plus a 3.8 percent surtax) or a return of capital dividend (tax rate of up to 20% plus a 3.8 percent surtax);
- When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from
- When allowed, a REIT pays corporation taxes and keeps the profits (20 percent maximum tax rate, plus the 3.8 percent surtax).
Furthermore, the maximum capital gains rate of 20% (plus the 3.8 percent surtax) applies to the sale of REIT stock in general.
The withholding tax rate on REIT ordinary dividends paid to non-US investors is depicted in this graph.
How can I avoid paying REIT tax?
REITs are already tax-advantaged investments because their profits are shielded from corporate income taxes. Because REITs are considered pass-through corporations, they must disperse the majority of their profits to shareholders.
The majority of your REIT dividends will be classified as regular income if you hold them in a conventional (taxable) brokerage account. However, it’s likely that some of your REIT dividends will fall under the IRS’s definition of qualified dividends, and that some of them would be treated as a non-taxable return of capital.
Ordinary income REIT dividends meet the requirements for the new Qualified Business Income deduction. This permits you to deduct up to 20% of your REIT payouts from your taxable income.
Holding REITs in tax-advantaged retirement accounts, such as regular or Roth IRAs, SIMPLE IRAs, SEP-IRAs, or other tax-deferred or after-tax retirement accounts, is the greatest option to avoid paying taxes on them.
You can save hundreds or thousands of dollars on your investment taxes if you follow these guidelines.
Is it wise to invest in REIT ETFs?
These ETFs make investing in REITs simple. REITs have historically provided investors with above-average dividend income and price appreciation, resulting in good overall returns. Meanwhile, ETFs make it simple to invest in the REIT industry by giving investors broad exposure to the most popular REITs.
Is it true that REITs outperform the S&P 500?
According to Wells Fargo & Co., equity real-estate investment trusts in the United States may outperform the S&P 500 index next year.
According to FactSet data, the MSCI US REIT Index, which measures equity REITs with a stake in assets across the office, residential, retail, industrial, hotels and resorts landscape, has risen roughly 32% this year. The S&P 500 has gained roughly 25% so far in 2021, according to the data.
Are losses passed down to REITs?
Finally, a real estate investment trust (REIT) is not a pass-through corporation. This means that, unlike a partnership, a REIT is unable to pass on any tax losses to its shareholders.
Why are REITs a poor investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
Share Value
Because non-traded REITs aren’t publicly traded, they have less disclosure obligations and are less liquid. As a result, determining the value of the underlying assets, as well as the market value at any one time, is challenging.
Lack of Liquidity
Because they are not traded on a public market, non-traded REITs are likewise illiquid.
One of the major advantages of a REIT is the option to sell your shares, thus if the REIT is not publicly traded, you are foregoing one of the most important benefits of owning one.
Non-traded REITs are frequently unable to be sold without a fee after a minimum of three, five, or even seven years. Early redemption is sometimes possible, but it comes with a cost.
Distributions
Non-traded REITs work by pooling funds to purchase and manage real estate.
Dividends are sometimes distributed from the pooled funds rather than the income earned by the assets. This approach reduces the REIT’s cash flow and lowers the value of its stock.
Fees
Many charge 7-10% of all funds invested, with others charging as much as 15%. Imagine purchasing an investment and being 10% or more in the red before you’ve even purchased a single property.
Furthermore, management fees are the unsung hero of REIT performance. Pay attention to how much the managers are paid and whether they are paid a percentage of gross rents, purchase/sale price, or something else.
On a tax return, where do REITs go?
Dividend payments are a frequent technique to make these transfers. Dividends can be fully PID, entirely non-PID, or a combination of the two; on a dividend-by-dividend basis, the Board will determine the most appropriate make-up. Furthermore, the Scrip Dividend Alternative’s PID/non-PID make-up may differ from that of the underlying cash dividend.
PID & non-PID dividend payments
Shareholders should be aware that PID and non-PID dividends have different tax treatment. In the hands of tax-paying shareholders, PIDs are taxable as property letting income, but they are taxed independently from any other property letting revenue they may get.
Forms for requesting withholding tax exemption on PID dividend distributions are available:
- The PID from a UK REIT is included on the tax return as Other Income for UK residents who receive tax returns.
- Dividends received from non-REIT UK companies will be regarded in the same way as dividends received from REIT UK companies. From April 6, 2016, the non-PID element of dividends received by UK resident shareholders liable to UK income tax will be entitled to the tax-free Dividend Allowance (£5,000 for 2016/17) if they are subject to UK income tax. It should be noted that the PID component of dividends is not covered by this allowance.
- Any normal dividend paid by the UK REIT is included on the tax return as a dividend from a UK firm for UK residents who receive tax returns. Your dividend voucher will list your firm shares, the dividend rate, the tax credit (for 2016 and preceding years), and the dividend payable. Add the tax credit to the total dividend payments in box 4 on page 3 (box references are for the 2018 return).
Sale of shares by UK and non-UK resident shareholders
Gains realized by non-UK residents must be disclosed to HM Revenue & Customs within 30 days of the transaction.
Gains realized by UK citizens should be recorded as usual on the tax return.
Are dividends from REITs tax-free?
Pankaj Mathpal, Founder & CEO of Optima Money Managers, said, “Long-term investment in REITs helps an investor earn more.” “REIT investment is preferable to direct real estate investment since it provides greater liquidity to the client. Aside from that, when investing in REIT shares, the investor receives an indexation benefit on long-term investments, which is not accessible when investing in direct real estate. In a long-term REIT investment, cost appreciation is applied to one’s income, resulting in a lower net income tax outgo, but in real estate, one’s income is simply the difference between the buy and sell price of one’s property.”
Vishal Wagh, Research Head at Bonanza Portfolio, highlighted the income tax benefit of long-term REIT investing, saying, “The REIT is tax-free on the interest and dividends it receives from the SPVs. Rental revenue earned by the REIT, which it would have earned if it owned property directly, is likewise tax-free. The REIT’s rental revenue is tax-free in its hands, but taxable in the hands of the investors. When selling valued stock, you can spread out the capital gains over a period of years. Unfortunately, real estate investment does not have the same benefit; you must claim the entire gain on your taxes in the year the property is sold.”
Which ETF is the most suitable for a taxed account?
“Start with index ETFs,” suggests Alissa Krasner Maizes, a financial adviser and founder of the financial education website Amplify My Wealth. “They have modest expenses and provide rapid diversity.” Some of the ETFs she recommends could be a suitable fit for a wide range of investors:
Taveras also favors ETFs that track the S&P 500, which represents the largest corporations in the United States, such as:
If you’re interested in areas like technology or healthcare, you can also seek for ETFs that follow a specific sector, according to Taveras. She recommends looking into sector index ETFs like:
ETFs that monitor specific sectors, on average, have higher fees and are more volatile than ETFs that track entire markets.