Most stock dividends qualify for lower long-term capital gains tax rates because they fit the IRS definition of “qualified dividends.” Most REIT payouts do not meet the definition.
As a result, the vast majority of REIT dividends are taxable at your marginal tax rate.
Your REIT dividends may, nevertheless, qualify as eligible dividends. Long-term capital gains can be distributed by a REIT when an asset is sold or the REIT gets a qualified dividend.
Are REIT dividends ordinary or qualified?
As a result of this, dividend payments from REITs might be taxed at a variety of different rates, depending on the type of dividends received. Investors in publicly traded firms, including REITs, are expected to get clarification on the tax treatment of dividends paid out in the previous year by their company early in the year. The Industry Data section has a historical record of how REIT distributions have been split between regular income, return of capital, and capital gains.
In addition to the 3.8% surtax on investment income, most REIT dividends are taxed at a rate of 37 percent (returning to 39.6 percent in 2026). Up to the end of 2025, taxpayers can normally deduct 20% of their total eligible business income, which includes dividends from qualified real estate investment trusts (REITs). The maximum effective tax rate on Qualified REIT Dividends is normally 29.6 percent after deducting the 20%.
However, in the following circumstances, dividends from REITs will be subject to a lower tax rate:
- For example, a REIT can pay out a maximum tax rate of 20% on capital gains distributions and a 3.8 percent surtax on returns of capital.
- A REIT is subject to an additional 3.8 percent surtax on dividends received from a taxable REIT subsidiary or other firm (20 percent maximum tax rate).
- When allowed, a REIT pays corporation taxes and keeps the profits it generates (20 percent maximum tax rate, plus the 3.8 percent surtax).
REIT stock sales are also subject to the maximum capital gains rate of 20% (plus the 3.8 percent surtax).
Non-U.S. investors who receive REIT ordinary dividends are subject to a withholding tax in the United States.
Are all REITs non qualified dividends?
Non-qualified dividends, which do not qualify for the lower capital gains tax rate, are the most common type of REIT distributions. On eligible dividends, an individual can expect to pay a 15% capital gains tax, but on non-qualified dividends, they will be taxed at their ordinary income tax rate.
Are REIT preferred dividends qualified?
REIT Preferences are not taxed as such from a financial standpoint “Rather of being taxed at the maximum rate of 15% to 20%, “qualified” dividends are instead taxed as regular income. As a result, the trade-off in tax treatment is worth it because no REIT has ever incurred a loss in the history of the company “Paying billions of dollars in penalties for opening unauthorized accounts.
How are REIT dividends reported?
Ordinary income is virtually often the source of REIT dividends. There are two sections in Box 1 of the 1099-DIV where a REIT discloses these dividends:
- Box 1a shows your “ordinary dividends,” or the total dividends you’ve received. Unless a portion or all of them are “qualified dividends,” these will be taxed at your regular income tax rate, the same as wages from a job.
- ‘Qualified dividends’ are shown in Box 1b. They are included in Box 1a and do not add to the amount displayed in Box 1a, which is already included. Lower capital gains rates apply to this part of qualifying dividends. REIT distributions are generally exempt from the definition of “qualified dividends” because of this. Whether or whether dividends are tax-deductible is determined by the type of investment that generated the profits that will be distributed to stockholders.
Are REIT dividends taxable in a Roth IRA?
Holding your REIT investments in a Roth IRA provides two major advantages: dividend compounding and tax-free earnings.
There are no capital gains taxes or dividends to pay when you sell investments in a tax-advantaged retirement plan, which means that you won’t have to pay taxes on the dividends you receive. When you take money out of the account, there are no tax consequences.
This is a huge advantage when it comes to REIT dividends. One of the key advantages of being a REIT is that its profits are not taxed at the corporate level. In a Roth IRA, dividends are not taxed at the individual level. The tax categorization of REIT dividends can be rather complicated, and keeping them in a Roth IRA can help you avoid this issue.
Your REIT dividends and the profits you make when you sell them will never be taxed because qualifying Roth IRA withdrawals are totally tax-free. This can make a big difference in the long run.
Is a REIT tax exempt?
REITs are regarded as pass-through entities for tax purposes due to the last stipulation. There are also LLCs and partnerships that are pass-throughs. Think of a convenience store that you and two co-owners own as an example. On your individual tax return, you’ll record your part of the company’s profits as income.
A REIT’s profits are not taxed at the corporate level because they are a pass-through enterprise. No matter how much money the REIT makes, it won’t have to pay a penny in corporate taxes as long as it complies with the REIT standards.
Investors in REITs will greatly gain from this. Most dividend-paying equities are taxed twice because of the double taxation. When a business makes a profit, it is required to pay corporation taxes (currently taxed at a 21 percent rate). These gains are then taxed again as dividends for shareholders.
REITs aren’t totally tax-exempt, but they aren’t completely tax-free. Real estate taxes remain an issue for them, for one thing. Additionally, REITs may be required to pay income taxes in certain circumstances.
Why are REITs a bad investment?
For some, REITs are not a good fit. This section is for you if you’re wondering why REITs are a bad investment for you.
In general, REITs don’t provide much in the way of capital appreciation. Due to REITs’ obligation to return 90% of their taxable income to investors, their capacity to reinvest in properties and increase their value or to acquire new holdings is considerably reduced.
Due to their structure, REITs have a penchant for charging exorbitant management and transaction fees.
REITs, on the other hand, have become increasingly connected with the overall stock market over the years. Due to your portfolio’s increased exposure to market fluctuations, one of the earlier advantages has become less appealing.
Is a REIT ETF taxed like a REIT?
What is the tax treatment of REIT ETF dividends? In most cases, REIT ETF dividends will be taxed at your regular income tax rate after the 20% qualifying business income deduction is applied to those payments. On Form 1099-DIV, you may be liable for capital gains tax on some REIT ETF earnings.
Does S&P 500 ETF pay dividends?
It’s the most popular ETF in existence, as well as a dividend-payer, and the SPDR S&P 500 ETF (SPY A). If the prospectus is correct, the fund holds on to all dividends until the time comes to distribute them.
Why are REIT dividends so high?
Retirement savers and retirees who need a steady source of income to cover their living expenses can benefit from REITs because of their significant dividends. Because they must yearly distribute at least 90% of their taxable profits to shareholders, real estate investment trusts (REITs) pay out large dividends. There is a steady flow of rent payments from the tenants of their properties that fuels their profits. Another reason why REITs are an excellent portfolio diversifier is because of their low correlation with other equity and fixed-income investments. In a portfolio, REIT returns tend to “zig” when other investments “zag,” reducing total volatility and increasing returns for a given amount of risk, as shown in the graph below.
- Comparable Long-Term Returns: REITs have delivered comparable long-term total returns to those of other stocks.
- The dividend yields of REITs have historically supplied a continuous stream of income regardless of market conditions, and this has been the case for many years.
- Stock markets offer easy access to publicly traded REITs’ shares.
- Listed REITs are subject to constant scrutiny by a wide range of third parties, including independent directors, analysts, and auditors, as well as members of the business and financial press. Investors benefit from this extra layer of safety and insight into the health of a REIT’s finances.
- REITs are a good way to diversify your portfolio because they often have minimal correlations with other equities and bonds.
