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.
How is income from REITs 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 tax on REITs?
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.
How do REIT ETFs pay dividends?
Real estate firms must pay out 90% of their taxable revenue to investors to qualify as a REIT—in reality, most REITs pay out more than 100%, as companies can deduct depreciation and lower their overall taxable income. As a result, they’re a popular asset type among investors looking for a steady stream of income.
Individual REITs, on the other hand, have sophisticated tax structures that might be costly to an individual investor. REIT dividends aren’t eligible for the reduced long-term capital gains rate because they’re generally taxed as regular income. The majority of those dividends, however, qualify as Qualified Business Income (QBI), allowing taxpayers to deduct 20% of their income above the tax threshold.
The 2019 tax reform package made changes to the tax rules to allow ETF investors to claim the QBI deduction.
Aside from that, REIT ETFs pay dividends in the same way that any other dividend-paying ETF does: if you hold an ETF for less than 60 days before it pays a dividend, the payout is taxed as ordinary income. If you keep the ETF for more than 60 days, it becomes a “qualified dividend,” which is taxed at 0%, 15%, or 20%, depending on your tax status.
Why are REITs a bad 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.
Are REIT dividends taxable if reinvested?
The tax rules that govern REITs encourage the distribution of earnings to shareholders in the form of dividends. The same requirements apply to dividends, which means that even if they are reinvested in more REIT shares, investors must pay taxes on them.
Why do REITs not pay taxes?
A REIT is required by law to deliver at least 90% of its taxable revenue in the form of dividends to its owners each year. This allows REITs to transfer their tax burden on to their shareholders rather than paying federal taxes.
Where do REITs go on tax return?
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.
Do you pay taxes on ETF dividends?
ETF dividends are taxed based on the length of time the investor has owned the ETF. The payout is deemed a “qualified dividend” if the investor held the fund for more than 60 days before the dividend was paid, and it is taxed at a rate ranging from 0% to 20%, depending on the investor’s income tax rate. The dividend income is taxed at the investor’s ordinary income tax rate if the dividend was kept for less than 60 days before the payout was issued. This is comparable to how dividends from mutual funds are handled.
How much dividends do REITs pay?
REITs, or Real Estate Investment Trusts, are well-known for paying out dividends. Equity REITs have an average dividend yield of roughly 4.3 percent. However, there are a few high-dividend REITs that pay much higher dividends than the average.
A REIT’s dividend yield is determined by its current stock price. That means that even if a REIT pays a very large dividend, it won’t be a viable investment if the price falls dramatically.
When looking for dividend income, it’s crucial to look at more than a REIT’s yield. You’ll want to look at criteria that will tell you how healthy a REIT is and how likely it is to pay you a nice annual dividend year after year.
When investing in a high-income REIT, check sure the dividend yield isn’t too good to be true. There are a few warning signals to look for that could indicate problems ahead.
- Over-leveraged. It’s possible that a REIT pays big dividends because it took on too much debt to buy its assets. If their real estate investment portfolio is overleveraged, they are extremely exposed to real estate market downturns or vacancy rises.
- Payout ratio is high. Because REITs are required to deliver 90% of their taxable income to shareholders, they can offer substantial dividends. However, tax deductions such as depreciation are not included in taxable income. This allows them to maintain some cash on hand. A high-dividend REIT’s high payout ratio may explain why it pays so well. The difficulty is that they don’t have enough liquid money to deal with unanticipated downturns. A REIT with a lower payout ratio will have more cash on hand to buy additional real estate and will have a safety net if the real estate market tanks.
- Revenue is decreasing. For any form of investment, this is a significant red flag. It’s easy to overlook a lousy quarter. A consistent drop in profits is usually something to avoid. They could be investing in depressed locations or property types that are losing favor, lowering their rental income. They could also be selling homes to pay down debt, resulting in lower rental revenue.
