Dividends paid by REITs are taxed as either ordinary income, capital gains, or return of capital, depending on the circumstances. 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). Assuming that a 20% deduction is taken into account, the highest effective tax rate on Qualified REIT Dividends is normally 29.5 percent
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).
- Taxes are paid by a REIT and profits are retained when permissible (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 receiving REIT regular dividends are subject to a U.S. withholding tax rate shown in this graph.
How are REIT payouts taxed?
For the listed property industry, the Real Estate Investment Trust (REIT) regime is poised to bring a new era of tax benefits and predictability where none previously existed in the context of property loan stock companies. The REIT regime is expected to usher in a new era of listed property.
The new and untested regulation, however, creates a number of difficulties and oddities, some of which are explored in the following paragraphs.
REITs are defined under the Income Tax Act No. 58 of 1962 (the Act) by section 1 as “basically” any South African-based firm that lists its shares on an exchange as REITs under the JSE Listings Requirements.
- The amount of any “qualified distribution” paid by a REIT during the year of assessment might be deducted from its income. It is defined in section 25BB to include (broadly speaking) any dividend or interest paid or accrued in respect of the property linked unit by REITs or CPCs during the year of assessment, provided that more than 75% of the gross income received by or accrued to such REITs or CPCs until the date of declaration is rental income. As defined by International Financial Reporting Standard 10 (IFRS), a CPC is a subsidiary of a REIT. There are two types of subsidiaries: those that are owned by their parent company, and those whose parent company owns them.
- All financial instruments other than shares in a REIT and CPC must be treated as non-capital instruments and therefore must be included in the income of the REIT or CPC for the year of assessment they were received or accrued.
- Immovable property cannot be deducted from a REIT or a CPC as an allowance, according to certain provisions of the Act.
- Real estate investment trusts (REITs) have a substantial advantage over other types of investment vehicles since they are exempt from capital gains and losses on the sale of their assets, including real estate and shares in a CPC.
A maximum tax rate of 40% applies to dividends received or accumulated by a REIT by a South African tax resident individual who invests in a REIT. The dividends tax exemption for such a person, however, will not apply. In the case of a REIT or a CPC, interest earned or accrued on a debenture that forms part of a property linked unit is treated as a dividend and is therefore liable to income tax in the hands of the person receiving it (but exempt from dividends tax).
If a South African trust invests in a REIT, profits earned or accrued from a REIT would be subject to income tax at a rate of 40%. Alternatively, the money might be transferred to the recipients, who would be taxed on it (according to the “conduit principle”). Such a payout is exempt from dividends tax, however, for the trust (or, if relevant, for the trust’s beneficiary).
South African income tax and dividends tax will be excluded for overseas investors who received or accrued dividends from a REIT or a CPC prior to 1 January 2014. As of January 1, 2014, international investors will be taxed at a rate of 15% of the dividend amount received or accumulated (subject to any reduction in this rate as result of the application of a Double Tax Agreement concluded by South Africa), but they will be free from South African income tax.
Despite the fact that distributions received by or accrued from REITs or CPCs are free from income tax for foreign investors, such distributions would represent gross income (i.e. revenue generated from South Africa) in their hands. As a result, foreign investment in a South African REIT or CPC could result in additional regulatory responsibilities for the country (for example: registration as a taxpayer in South Africa, the submission of annual tax returns etc.)
- According to the JSE Listings Requirements, a REIT must disperse 75% of its profits “of the company’s “distributed profits.” “As per the JSE Listings Requirements, “distributable profits” are calculated by subtracting gross income, as defined in the Act, from distributable profits, as well as any other deductions or allowances that a REIT may claim under the Act, such as the “qualifying distribution” described in section 25BB. Losses resulting from property damage are frequently assessed by property owners “high gearing, property allowances, or interest charges associated with high gearing. “pre-production interest” According to the REIT Listings Requirements, it is not apparent if such losses can also be taken into consideration when determining a company’s value “Profits that a REIT can distribute to its shareholders.
- There may be tax implications for a real estate investment trust in the event that it enters into any hedging agreements, such as interest rate swaps, to secure its funding, according to the REIT Act. Gains from the realization of these hedges are often not distributed because they are deducted from the “matching” losses that will be suffered when the loan funding is realized. REITs are required to release at least 75% of their distributable earnings, therefore any hedging gains may have to be distributed by the REIT in order to meet the 75% distribution requirement.
- It is a result of REIT legislation that dividends received by a REIT or CPC on non-REIT shares are included in the REIT’s income. Due to the tax consequences of not paying such amounts, the REIT will have to transfer these funds back to shareholders. These distributions will be taxed to the shareholders (assuming that they are not exempt). Income tax would have been due on the dividends paid out to the shareholders of the underlying companies, as well. As a result, there may be a situation where there is a doubling of taxes.
- As a result of the wording of the REIT Act, there is the potential for the shareholders of a REIT or CPC to be taxed on the repurchase price rather than the deducted amount.
- Capital gains (which are now tax-exempt) can be taxed on if a REIT or CPC liquidates all of its assets and distributes profits to its investors. That’s why it’s crucial for minority shareholders to think through the ramifications of “shareholders in a “joint venture” becoming a REIT.
- It’s possible that, under the current wording of the REIT legislation, if a property company declares a dividend in a year of assessment to its shareholders and then later is taken over by a REIT, it could be subject to income tax on that dividend, even though the company only became a CPC after the dividend was received.
As far as we know, laws will be amended to address some of these inconsistencies.
It is highly recommended that any company wishing to list as a REIT or a joint venture company where one of the shareholders is about to become a REIT obtain detailed tax advice in relation with the tax implications that may arise in this regard and gain an understanding of the potentially relevant anomalies that may arise in respect of this.
How are REIT dividends taxed if reinvested?
There are a number of REITs that allow investors to spend dividends to purchase additional REIT shares. With these plans, investors can reap the benefits of dividend-paying companies at low or no expense. Dividends can be reinvested, but the dividends are not taxed or deferred. At the end of the year, a dividend reinvestment plan will send out a Form 1099 for the dividends earned on REIT shares in the plan. There must be a tax bill for those dividends on an individual investor’s tax return.
How do REITs avoid taxes?
Because they don’t have to pay corporation income taxes on their profits, real estate investment trusts (REITs) are already tax-advantaged assets. This is because REITs are considered pass-through organizations because they must disperse most of their earnings to shareholders.
Most of your REIT dividends will be taxed as regular income if you hold them in a conventional (taxable) brokerage account. A part of your REIT dividends may qualify as “qualified dividends” and thus be taxed at a lower rate than regular dividends.
The new Qualified Business Income deduction is available for REIT dividends that are taxable as regular income. This permits you to deduct up to 20% of your REIT dividends from your taxable income.
Tax-deferred retirement accounts, such standard or Roth IRAs or SIMPLEs, SEP or other tax-deferred retirement accounts, are the easiest option to avoid paying taxes on REITs.
You can save hundreds or even thousands of dollars in investment taxes if you follow the advice in this article.
Do REITs have tax advantages?
Understanding the tax consequences of investing in a REIT (Real Estate Investment Trust) is one of the most important aspects for a well-balanced portfolio “For investors, REITs”) can help them evaluate various investment alternatives. Jamestown Invest 1 LLC is now being offered by Jamestown “Direct access to approved and non-accredited investors in the United States is provided by “Fund” via the Internet. As a REIT, the Fund aims to purchase and manage a portfolio of real estate investments in urban infill locations in the direction of anticipated growth. Hopefully, by the end of this essay, you’ll have a better grasp on some of the IRS requirements governing REIT investments, as well as a better understanding of your 1099-DIV form.
What is a REIT?
The first REITs were incorporated into law in the United States in 1960. Investment in commercial real estate had hitherto been restricted to institutional investors. Most people were unable to invest in a meaningful and varied way because they lacked the finances. The REIT structure was designed by Congress in order to address this disparity. Individual investors were able to pool their money and participate meaningfully in commercial real estate by investing in a REIT.
In addition, you may have heard that REITs are a time-consuming administrative burden, and this is accurate! It’s not for no cause, though. Specific restrictions have been imposed by Congress in order to ensure that REITs fulfill their legislative mandate. There must be specified amounts of real estate asset investment and revenue from real estate and other passive vehicles for the REIT to ensure that the vehicle is a passive real estate investor. Specific shareholder criteria and constraints on the concentration of REIT share ownership ensure that funds are pooled by individual investors. Tax benefits are available to REITs that meet these criteria (discussed in more detail below).
How Are Realized Returns Determined?
Commercial real estate funds create returns for investors, and it may be necessary to clarify this before discussing the tax advantages of investing in REIT funds. Operating dividends and capital gain distributions make up the majority of real estate profits.
- Operating dividends are given to investors on a monthly or quarterly basis from the fund’s underlying real estate investments, which create cash flow. Income from the REIT’s portfolio, such as interest and dividends, is the most common source of this.
- Selling real estate within the REIT results in a capital gain, which can be included in the realized return.
How Are Realized Returns Categorized?
The majority of a REIT’s taxable income must be distributed to its shareholders in order to maintain its beneficial tax status. REIT dividends can generally be divided into the following groups. There is a different tax treatment for each category.
- Short-term and long-term capital gains are taxed differently depending on whether the investment or its underlying property is kept for less than 12 months, respectively.
Remember from our post on how to invest in real estate with a self-directed IRA that you only pay taxes on your investment in a REIT in a tax-deferred account like a regular IRA.
What Are the Potential Tax Benefits of Investing in a REIT?
REITs are given special tax treatment if the IRS standards are met. Eligible REIT arrangements are not subject to double taxation, unlike other U.S. corporations. REITs are exempt from corporate income tax because dividends paid to shareholders are deducted. The REIT’s dividends may then be taxed at a lower rate in the United States for the benefit of its shareholders.
Investment in REITs became more tax-efficient after the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. Under the Tax Cuts and Jobs Act of 2017, many taxpayers can claim a tax deduction of up to 20% of their Qualified Business Income (QBI). Ordinary REIT distributions qualify as Business Income, and REIT dividends are not subject to the income thresholds, meaning that REIT investors can benefit from this provision whatever of their income level.
At most, taxpayers can deduct 20% of their total eligible business income, but no more than that 20% of their taxable income that is left over after subtracting any net capital gain that they may have realized (if any).
Following-tax returns on a $10,000 investment with a 7 percent annual dividend yield are shown in the example below. Single tax payers who have no capital gains and are in the highest federal marginal tax bracket of 37 percent will be used in our scenario.
Will I Receive a Schedule K-1 or Form 1099-DIV?
Investors frequently inquire about whether they will receive a 1099 or a K-1 at the beginning of each year. There are some general standards that you should be aware of before making your investment, even if the Investor Relations or Tax Team of a Sponsor can help provide this information to you.
The Internal Revenue Service (IRS) issues Form 1099-DIV to real estate investment trusts (REITs), brokerage firms, banks, and other financial institutions. A 1099-DIV is sent to anyone who has received dividends or other types of distributions worth at least $10. Regardless of where the property is located, all dividend income is subject to state and local taxes in the state where the individual resides.
An yearly tax form issued by the Internal Revenue Service for an investment in a partnership is known as a Schedule K-1. Each partner’s portion of the partnership’s earnings, losses, deductions, and credits is reported on Schedule K-1. A partnership’s real estate revenue may be taxed in the state or states where the property is located. Similar to a Form 1099, the Schedule K-1 is used for tax reporting purposes.
Understanding your IRS Form 1099-DIV
A 1099-DIV will be issued to you if you invest directly in a REIT. Several boxes on your Form 1099-DIV will already be filled in when you receive it. TurboTax, the industry leader in tax software for preparing U.S. tax returns, recently issued an article outlining some of the reporting boxes and their consequences.
- Amounts reported in box 1b are those from box 1a that are regarded as qualified dividends.
- If you receive a capital gain distribution from your investment, it will appear in box 2a on your tax return.
- Boxes 4 for federal withholding and 14 for state withholding will be used to report any taxes withheld from your distributions.
REITs that follow the rules do not have to pay corporate taxes. Ordinary dividend income and capital gain dividends are taxed separately by REIT shareholders, who pay their taxes according to their individual tax rates. Before income tax is calculated, investors in REITs can deduct up to 20% of the dividends they receive.
One of the advantages of investing in a multi-property fund is that it provides diversity without the hassle of having to file numerous state income tax returns separately. Rather of investing in several properties through partnerships, investors will have to pay state taxes on their dividends and capital gains solely in the state(s) in which they reside.
Though public REITs listed on an exchange give the tax advantages we’ve described above, investors seeking a more diversified portfolio may want to consider leveraging some of these benefits while adding non-correlative private real estate. Alternative investments have long been popular among the wealthiest investors, but the general public has yet to adopt them as a mainstay of their investing portfolios.
Is REIT dividend tax free?
Pankaj Mathpal, founder and CEO of Optima Money Managers, discussed how long-term investing in REITs can help an investor earn more “REIT investment is superior to direct real estate investment because it provides investors with greater liquidity. There are also advantages to REIT investments, such as the ability to receive indexation benefits for long-term investments, that are not available to investors in direct real estate. Investment in long-term REITs results in lower net income tax outlays, compared to real estate, because appreciation of the investment’s cost is applied to one’s income.”
Vishal Wagh, Research Head at Bonanza Portfolio, emphasized the tax advantages of long-term REIT investment “The REIT is immune from paying taxes on the interest and dividends it receives from SPVs. Tax-free rental income received by REITs is another benefit of owning property through a REIT. The REIT’s rental revenue is tax-exempt in its own hands, but taxable in the hands of the investors. You can sell off your stock over a period of time to spread out the capital gains. Investment in real estate, on the other hand, isn’t afforded the same tax-deferral benefits as other investments.”
Where do REIT dividends go on tax return?
Each year, you should receive a copy of IRS Form 1099-DIV if you own shares in a REIT. This shows you how much in dividends you earned, as well as the type of dividends you received:
The 1099-DIV provides detailed information on how to declare various types of income on your tax return.
Why are REITs a bad investment?
Some people may not be interested in REITs. This section is for you if you’re wondering why REITs are a bad investment for you.
Capital appreciation is the main drawback of REITs.. This is due to the fact that REITs must return 90% of their taxable revenue to investors, which severely limits their capacity to reinvest in existing properties or acquire new ones.
Another issue is that REITs tend to have high management and transaction costs because of their structure.
In addition, over time, the performance of REITs has been increasingly associated with that of the larger stock market. Due to your portfolio’s increased sensitivity to market fluctuations, an earlier benefit has become less appealing.
How much dividends do REITs pay?
Dividends paid by real estate investment trusts, or REITs, are well-known. Equity REIT dividend yields are typically around 4.3%. But there are some high-dividend REITs that pay out substantially more than the norm.
It is the current stock price that determines the dividend yield of a REIT. A high dividend isn’t enough to make up for the fact that the stock’s value has fallen dramatically.
When seeking dividend income, investors need consider more than just a REIT’s yield. Your best bet is to look at metrics that can tell you more about a REIT’s financial health and how likely it is to pay you a dividend each year.
In an investment in a high-dividend REIT, you want to ensure that the dividend yield is not too good to be true. There are a few warning signs to keep an eye out for that could mean danger is just around the corner.
- Over-leveraged. It is possible that a REIT is paying large dividends because they are acquiring its assets with too much leverage. If their real estate investment portfolio is overleveraged, they are extremely sensitive to any real estate market declines or surges in vacancies.
- Payout ratio is high. By paying shareholders 90 percent of their taxable revenue, REITs can afford to pay hefty dividends. However, tax deductions like depreciation are excluded from the taxable income. That provides them a little extra cash to work with. The high payout ratio of a high-dividend REIT may be the reason for its large payouts. It’s a problem since they don’t have a lot of liquid capital to deal with unexpected difficulties. Real estate investment trusts that are more conservative in their payout ratios are better prepared for a downturn in the market.
- Revenue has decreased. Investors should avoid this at all costs. If you have a difficult quarter, it’s easy to forget about it. A long-term drop in earnings is often a bad sign. They may have invested in locations that are in decline or in property types that are losing their appeal, which could have an impact on their rental returns. Rental revenue may also be reduced because they’re selling their properties to pay off debt.
Do REITs pass-through losses?
Finally, a REIT does not qualify as a pass-through corporation for the purposes of taxation. In contrast to a partnership, a REIT is unable to pass any tax losses on to its shareholders.
Can I hold a REIT in my TFSA?
The cost of a single-family house in Canada jumped 14.1% year-over-year in the first quarter of 2021, according to Royal LePage. Since last year, there has been a massive increase in the number of people looking to buy a property, as well as record-breaking sales and price appreciation. It might take up to 24 years for an average-earning family in Toronto to save enough money to put down a deposit on a home. Vancouver’s housing market isn’t much better, requiring a family of four to make more than $150,000 a year in order to afford most properties.
Investors and purchasers who entered the market at the beginning are now reaping the benefits of their early investments. For the past two decades, the average price of a home in the United States has increased by six percent each year. You can see why so many seasoned landlords are multi-millionaires by combining that rate of return with low interest rates and reasonable mortgages.
Let’s go with the flow. Access to this profitable market does not necessitate the typical down payment or mortgage approval process. A Real Estate Investment Trust (REIT) can be funded with TFSA assets (REIT). You can use your existing or new TFSA accounts to invest in REITs because they are registered funds. This means you may invest in real estate and contribute to your TFSA, which is a win-win scenario.
Because of the favorable tax treatment they receive, real estate investment trusts (REITs) are a wise investment choice. Taxes are usually deferred until you sell your REIT investment, allowing you to keep more money in your wallet for spending or reinvesting each year.
If you’re seeking for a safe, predictable, and tax-efficient monthly income, a private REIT is the best option.
TFSAs, or tax-free savings accounts, were introduced in 2009 as a method for people over the age of 18 to save money tax-free for the rest of their lives. Each year, even if you didn’t start a TFSA in 2009, you still have the opportunity to contribute.
An Individual Retirement Account (IRA), on the other hand, is a tax-advantaged savings account (TFSA). However, just about half of all Canadians are believed to have created a TFSA, so let’s have a look at the benefits.
Tax-free investment income is the most major advantage of having a TFSA. Canada Revenue Agency Unlike an RRSP, you won’t be taxed on the amount you withdraw from your investments, either.
You can contribute as much money as you like into your TFSA, regardless of your earning level! When it comes to an RRSP, however, the amount of money you may put in each year is directly linked to your income.
There is no expiration date on your contribution room. There is no need to be concerned if investors fail to meet their TFSA contribution quota for the year, as the remaining funds will be carried over to the following year.
The process of withdrawing money from a TFSA is a breeze. However, when it comes to your RRSPs, you’ll have to deal with things like withholding taxes, purchasing annuities, or opening RRIFs.
With a TFSA investment in a REIT, you have both equity exposure and leverage. You might think of it as employing a team of experts to buy real estate on your behalf. Adding a private REIT to your TFSA is a great way to diversify your investments in Canada’s real estate market.
Are REIT dividends taxable in a Roth IRA?
Investing in REITs in a Roth IRA offers two key 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. There are many advantages of becoming a REIT, but remember that gains from REITs are not taxable at the corporate level. The dividends you earn in a Roth IRA will not be taxed at the individual level, either. The tax categorization of REIT dividends can be rather complicated, and keeping them in a Roth IRA can help you avoid this issue.
Even if you sell your REIT investments, you won’t have to pay taxes on the dividends you receive or the profits you make. This can make a big difference in the long run.
