How REITs Are Taxed: A Guide for Investors

Understanding how taxes work is one of the most important parts of investing in real estate investment trusts (REITs). REITs are popular for their high dividend yields, but the tax treatment of those dividends differs significantly from most stock dividends. Before you invest, knowing how the IRS categorizes REIT income can help you make smarter decisions about where to hold your investments.

This article explains everything a beginner needs to know about REIT taxation, including the different types of REIT distributions, the Section 199A deduction, how selling REIT shares is taxed, and how holding REITs in a retirement account changes the picture.

Tax laws can change and your individual situation may vary. Always consult a qualified tax professional for advice specific to your circumstances.

How REITs Avoid Corporate-Level Taxation

One of the most important features of a REIT is how it is taxed at the corporate level. Unlike a regular corporation, a REIT that meets all qualification requirements does not pay corporate income tax on the income it distributes to shareholders. This is what makes REITs so efficient as income-producing investments.

According to the Internal Revenue Service (IRS) and the SEC, a REIT must distribute at least 90 percent of its taxable income to shareholders each year as dividends. Most REITs choose to distribute close to 100 percent to eliminate their corporate tax liability entirely. By doing this, the REIT passes its income directly through to investors, who then pay tax on that income at the individual level.

This structure avoids the double taxation that applies to regular corporations, where the corporation pays income tax on its profits and then shareholders pay tax again on dividends they receive.

Four Types of REIT Distributions and How Each Is Taxed

REIT dividends are not all taxed the same way. Each year, the REIT reports how its distributions should be classified for tax purposes. Investors receive a Form 1099-DIV showing how much they received in each category. There are four main types:

1. Ordinary Income Dividends

The largest portion of most REIT dividends is classified as ordinary income. This is the income the REIT earns from rents, interest, and other real estate operations. Ordinary income dividends are taxed at your regular federal income tax rate, which can be as high as 37 percent under current law. This is significantly higher than the maximum 20 percent rate that applies to qualified dividends from most stocks.

Ordinary income dividends are reported in Box 1a of Form 1099-DIV.

2. Qualified Dividends

A small portion of REIT dividends may qualify as qualified dividends, which are taxed at the lower long-term capital gains rates of 0, 15, or 20 percent depending on your income. These typically come from income earned through a Taxable REIT Subsidiary (TRS), which is a subsidiary that pays corporate income tax and may generate qualified dividend income.

Most REIT income does not meet the IRS requirements to be treated as qualified dividends, so this box is usually small or empty for REIT investors. Qualified dividends appear in Box 1b of Form 1099-DIV.

3. Capital Gain Distributions

When a REIT sells a property it has owned for more than one year and realizes a profit, it may pass that gain along to shareholders as a capital gain distribution. These distributions are taxed at long-term capital gains rates of 0, 15, or 20 percent, regardless of how long you personally have held shares in the REIT.

Capital gain distributions appear in Box 2a of Form 1099-DIV.

4. Return of Capital

Some REIT distributions are classified as return of capital, which means the payment represents a return of your original investment rather than income from the REIT's operations. This can happen when the REIT's cash distributions exceed its taxable earnings, often because of large depreciation expenses.

Return of capital is not taxed in the year you receive it. Instead, it reduces your cost basis in the REIT shares. A lower cost basis means you will have a larger taxable gain when you eventually sell your shares.

If enough return-of-capital distributions are paid over time and your cost basis reaches zero, any further return-of-capital payments are taxed as capital gains in the year received.

Return of capital appears in Box 3 of Form 1099-DIV.

The Section 199A Deduction for REIT Investors

One of the most significant tax benefits for REIT investors is the Section 199A deduction, which was created by the Tax Cuts and Jobs Act (TCJA) in 2017 and was permanently extended by the One Big Beautiful Bill Act, signed into law on July 4, 2025.

Under Section 199A, individual taxpayers can generally deduct up to 20 percent of their qualified REIT dividends. Qualified REIT dividends are ordinary REIT dividends that are not capital gain distributions and not qualified dividends. They are the ordinary income portion of your REIT distributions.

This deduction does not reduce your adjusted gross income. Instead, it reduces your taxable income, which lowers the amount of tax you pay on those dividends.

For an investor in the highest 37 percent tax bracket, the math works as follows (hypothetical example for illustration only):

Without the deduction, $10,000 of ordinary REIT dividends would be taxed at 37 percent, resulting in $3,700 in federal income tax.
With the 20 percent deduction, only $8,000 (80 percent of $10,000) is taxable.
At the 37 percent rate, the tax on $8,000 is $2,960, representing an effective rate of about 29.6 percent.

Your actual tax liability will depend on your total income, filing status, deductions, and other factors.

Important: There is no income limit to claim the Section 199A deduction for qualified REIT dividends. You do not need to itemize deductions. You claim it on Form 8995 or Form 8995-A, which flows to your Form 1040.

The total Section 199A deduction is also limited to 20 percent of your taxable income minus net capital gains for the year. In most cases this overall cap does not affect typical REIT investors, but it is worth being aware of.

Qualified REIT dividends are reported in Box 5 of your Form 1099-DIV, labeled Section 199A dividends.

Note: A holding period requirement applies. You must hold the REIT shares for more than 45 days during the 91-day period beginning 45 days before the ex-dividend date for the dividend to qualify as a Section 199A dividend.

How Selling REIT Shares Is Taxed

When you sell shares of a publicly traded REIT, any gain or loss is treated as a capital gain or capital loss, the same as selling any other stock.

If you held the shares for more than one year before selling, the gain is a long-term capital gain, taxed at 0, 15, or 20 percent depending on your income.
If you held the shares for one year or less, the gain is a short-term capital gain, taxed at your ordinary income tax rate.

The 3.8 percent Net Investment Income Tax (NIIT) may also apply to capital gains from selling REIT shares if your income exceeds the applicable threshold ($200,000 for single filers or $250,000 for married couples filing jointly, as of current law). This surtax also applies to ordinary REIT dividend income for higher-income investors.

Remember: return-of-capital distributions reduce your cost basis, so your taxable gain on sale may be larger than expected if you have received significant return-of-capital payments over the years.

REITs in Tax-Advantaged Accounts

If you hold REITs inside a tax-advantaged retirement account such as a traditional IRA or a 401(k), the tax treatment of REIT distributions generally does not matter in the year received. Dividends and capital gains accumulate without being taxed as earned.

With a traditional IRA or 401(k), you pay ordinary income tax when you withdraw money from the account in retirement. With a Roth IRA or Roth 401(k), qualified withdrawals in retirement are generally tax-free.

Because REIT dividends are mostly ordinary income rather than qualified dividends, some investors prefer to hold REITs in tax-advantaged accounts to defer or eliminate taxes on that income. However, inside a retirement account you cannot use the Section 199A deduction, since dividends in those accounts are not taxed in the year received.

The right account placement depends on your overall tax situation, retirement timeline, and investment goals. A qualified tax or financial professional can help you evaluate this decision.

Hypothetical Example: REIT Tax Reporting

The following is a hypothetical example to illustrate how REIT tax reporting works. All numbers are invented for educational purposes and do not represent any actual REIT.

Suppose an investor owns 500 shares of a hypothetical REIT and receives $2,000 in total distributions during the year. Their Form 1099-DIV shows the following breakdown:

Box 1a (Total ordinary dividends): $1,400
Box 1b (Qualified dividends): $100
Box 2a (Capital gain distributions): $300
Box 3 (Nontaxable return of capital): $200
Box 5 (Section 199A dividends): $1,300

How each portion would be taxed for this investor:

The $1,300 in Section 199A dividends qualifies for the 20 percent deduction, so only $1,040 is taxable at the investor's ordinary income rate.
The $100 in Box 1b qualified dividends is taxed at the lower qualified dividend rate.
The $300 in capital gain distributions is taxed at long-term capital gains rates.
The $200 return of capital is not taxed now but reduces the investor's cost basis in the REIT shares.

This example is hypothetical and simplified. Actual REIT distributions and their tax treatment vary. Always refer to the actual Form 1099-DIV provided by your REIT or brokerage and consult a tax professional.

Why REIT Taxation Matters to Investors

Understanding REIT taxation helps investors:

Plan which accounts are best suited for REIT investments (taxable vs. retirement accounts).
Accurately calculate after-tax returns when comparing REITs with other investments.
Understand why REIT dividends are generally less tax-efficient than qualified dividends from most stocks.
Take advantage of the Section 199A deduction, which can meaningfully reduce the tax burden on REIT income.
Track cost basis changes caused by return-of-capital distributions to avoid surprises at the time of sale.

Risks and Considerations

Tax law changes: Tax rules, rates, and deductions can change. The Section 199A deduction was permanently extended in 2025, but other rules may change in the future.
State taxes: This article focuses on federal income tax. Your state may tax REIT dividends differently.
Net Investment Income Tax: Higher-income investors may owe the 3.8 percent NIIT on REIT dividends and capital gains.
Ordinary income rates: Most REIT dividends are taxed at higher ordinary income rates rather than the lower qualified dividend rates.
Cost basis tracking: Return-of-capital distributions reduce your cost basis over time, increasing your taxable gain when you sell.
Holding period for Section 199A: You must satisfy a minimum holding period requirement for dividends to qualify as Section 199A dividends.

Common Mistakes to Avoid

Assuming REIT dividends are qualified dividends: Most REIT distributions are ordinary income, not qualified dividends.
Forgetting the Section 199A deduction: Many REIT investors overlook the 20 percent deduction on qualified REIT dividends.
Ignoring return of capital: Return-of-capital payments are not immediately taxed but reduce your cost basis and affect your eventual capital gain.
Failing to track cost basis changes: Reinvested dividends and return-of-capital distributions change your cost basis over time.
Assuming the same tax treatment inside a retirement account: Holding REITs in a retirement account changes how they are taxed and eliminates the Section 199A deduction benefit.
Not reviewing Form 1099-DIV carefully: All boxes on the 1099-DIV tell you how each dollar should be reported. Review all boxes, not just Box 1a.

Frequently Asked Questions

Are REIT dividends considered qualified dividends?

No. The vast majority of REIT dividends are ordinary income, not qualified dividends. Qualified dividends receive preferential tax rates of 0, 15, or 20 percent, but most REIT distributions do not meet the IRS requirements for that treatment. A small portion from Taxable REIT Subsidiaries (TRS) may qualify, but this is typically a minor part of the total distribution.

What is the Section 199A deduction for REIT dividends?

Section 199A allows individual taxpayers to deduct up to 20 percent of their qualified REIT dividends (ordinary REIT dividends that are not capital gain distributions or qualified dividends). This deduction was created by the 2017 Tax Cuts and Jobs Act and was permanently extended by the One Big Beautiful Bill Act signed into law on July 4, 2025. It is available regardless of whether you itemize deductions and is claimed on IRS Form 8995 or Form 8995-A.

How does return of capital work with REITs?

Return of capital is a distribution that represents a return of your original investment rather than income. It is not taxed in the year you receive it, but it reduces your cost basis in the REIT shares. A lower cost basis means a larger capital gain when you sell. If your cost basis reaches zero, any additional return-of-capital payments are taxed as capital gains.

Is it better to hold REITs in a taxable account or a retirement account?

This depends on your personal tax situation. Holding REITs in a traditional IRA or 401(k) defers all taxes until withdrawal. A Roth IRA can allow tax-free growth and withdrawals. However, inside a retirement account you cannot use the Section 199A deduction. Consult a tax or financial advisor to determine the best strategy for your circumstances.

Do I owe the 3.8 percent Net Investment Income Tax on REIT dividends?

You may owe the 3.8 percent Net Investment Income Tax (NIIT) on REIT dividends and capital gains if your modified adjusted gross income exceeds the applicable threshold ($200,000 for single filers or $250,000 for married filing jointly, as of current law). Consult the IRS or a tax professional for current thresholds and rules.

How do I report REIT dividends on my tax return?

Your brokerage or the REIT will send you a Form 1099-DIV each year. Ordinary dividends (Box 1a) are reported as income. Qualified dividends (Box 1b) receive lower rates. Capital gain distributions (Box 2a) are reported as long-term capital gains. Return of capital (Box 3) reduces your cost basis and is not reported as income. Section 199A dividends (Box 5) are used to calculate your deduction on Form 8995 or Form 8995-A.

Conclusion

REIT taxation is more complex than most dividend investing because distributions can be categorized as ordinary income, qualified dividends, capital gain distributions, or return of capital, each with different tax rates and treatment. Understanding these distinctions helps you accurately estimate your after-tax returns and make informed decisions about how and where to hold your REIT investments.

The Section 199A deduction, permanently extended in 2025, is a meaningful benefit for REIT investors, reducing the effective federal tax rate on qualified REIT dividends. Holding REITs in tax-advantaged accounts can also be a smart strategy, though it comes with tradeoffs.

As with all tax matters, the rules can be complex and your individual situation matters. Review your Form 1099-DIV carefully each year and consult a qualified tax professional for guidance tailored to your specific circumstances.

Continue learning about REIT investing by exploring related topics such as REIT dividend yields, how REITs generate income, and the different types of REITs available to investors.

Sources

Nareit — Taxes & REIT Investment — https://www.reit.com/investing/investing-reits/taxes-reit-investment
Internal Revenue Service (IRS) — Qualified Business Income Deduction — https://www.irs.gov/newsroom/qualified-business-income-deduction
Internal Revenue Service (IRS) — Instructions for Form 1099-DIV (01/2024) — https://www.irs.gov/instructions/i1099div
Jones Day — The One Big Beautiful Bill Becomes Law: Key Real Estate Tax Changes — https://www.jonesday.com/en/insights/2025/07/the-one-big-beautiful-bill-becomes-law-real-estate-tax-changes — July 2025
SEC Investor.gov — Real Estate Investment Trusts (REITs) — https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits
Investopedia — The Basics of REIT Taxation — https://www.investopedia.com/articles/pf/08/reit-tax.asp
TurboTax — Tax Tips for Real Estate Investment Trusts — https://turbotax.intuit.com/tax-tips/investments-and-taxes/tax-tips-for-real-estate-investment-trusts/L0tW3ad6C
SmartAsset — What Are Section 199A Dividends? — https://smartasset.com/taxes/section-199a-dividends

How REITs Are Taxed: A Guide for Investors