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.
Should I hold REITs in a taxable account?
Holding REIT investments in tax-advantaged retirement accounts like as IRAs is by far the greatest option to avoid paying taxes on them.
You don’t have to worry about paying dividend taxes each year in a retirement account, and you also don’t have to worry about capital gains taxes when you sell equities. REIT dividends are good candidates to hold in retirement accounts because most REIT dividends are considered regular income, and there’s also the “return of capital” part of REIT dividends that can increase your capital gains taxes. If you must pick between REITs and traditional dividend equities for your retirement accounts, REITs are likely to be the better option.
When you invest in REITs through a retirement account, you may reinvest 100 percent of your dividends, which is critical for increasing long-term compounding potential.
If you invest in REITs through a traditional IRA or another tax-deferred retirement account, you won’t have to pay taxes on the money until you remove it. Traditional IRA withdrawals are taxable income since traditional IRA donations are often tax-deductible.
If your REITs are held in a Roth IRA or similar after-tax retirement plan, however, you won’t have to pay any taxes on the earnings, even if you make eligible withdrawals. Because you don’t get a tax break for putting money into a Roth IRA, you’ve already paid tax on the money you put in, and your withdrawals are tax-free — even if your REIT assets are worth a lot more than you paid for them.
How are REITs treated for tax purposes?
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.
Should I hold REITs in TFSA?
Holding a REIT investment in a tax-free account, such as a TFSA, RRSP/RRIF, or RESP, is not an issue because no taxes are due, but it does have implications and considerations in a non-registered account.
Not just because the distribution is taxed as income, but also because there may be a return of capital (ROC), which affects your accounting. Because the dividend is turned into a possible capital gain to be paid later at the time of disposition, ROC from REITs is the most tax efficient payout.
ROC, on the other hand, makes accounting far more difficult. It’s preferable to save it in a TFSA or RRSP account.
If you’re looking for the greatest Canadian REIT to hold in a non-registered account, compare the REIT’s net income to an excellent high yield company like Bell Canada. Because of the tax implications, both investments may end up being the same in the end.
Should dividends be in taxable account?
Dividends that do not meet the qualifying dividend criteria are taxed at regular income rates in most cases. There are several investing techniques and retirement accounts, however, that do not require you to pay taxes on cash dividends. More information can be obtained from a financial or tax professional.
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 I report REIT income on tax return?
Each year, if you own REIT shares, you should receive a copy of IRS Form 1099-DIV. This shows how much money you got in dividends and what kind of dividends you got:
The 1099-DIV instructions explain how to report each type of payment on your tax return.
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.
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 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.”
Are REITs tax efficient?
REITs (Real Estate Investment Trusts) are a tax-advantaged option to invest in real estate. REITs receive tax-exempt status in exchange for paying out at least 90% of taxable income to shareholders.
How are REITs taxed in Canada?
The revenue and gains from a REIT’s property rental operation are not taxed in Canada. Instead, when a REIT’s property revenue is dispersed, shareholders are taxed on it, and some investors may be excluded.
