How REIT Dividends Are Taxed as Ordinary Income, Not Qualified Dividends

REIT dividends are taxed as ordinary income, not as may have access to dividends

Most dividends from stocks you own are taxed at the lower may have access to dividend rate — the same rate as long-term capital gains. REIT dividends work differently. When you receive a dividend from a real estate investment trust, the IRS treats it as ordinary income, which means it is taxed at your regular income tax rate, not the preferential may have access to rate. This applies to nearly all REIT dividends, regardless of how long you have held the shares.

The reason is structural. REITs are required by law to distribute at least 90 percent of their taxable income to shareholders. Because that income comes from rental payments, property sales, and mortgage interest — not from capital gains on stock appreciation — the tax code classifies the distributions as ordinary income rather than may have access to dividends. Your brokerage will report REIT dividends on Box 1a of your Form 1099-DIV, the same line used for non-may have access to dividends and other ordinary income.

This tax treatment matters because ordinary income rates are higher than may have access to dividend rates. If you are in the 24 percent tax bracket, may have access to dividends are taxed at 15 percent. REIT dividends in your account would be taxed at 24 percent instead. The difference compounds over time, especially if you hold REITs in a taxable brokerage account rather than a retirement account.

Key Takeaways

REIT dividends are always taxed as ordinary income on your federal return, even if you held the shares for years.
Your brokerage reports REIT dividends on Form 1099-DIV Box 1a, not in the may have access to dividend boxes.
Ordinary income tax rates explore to REIT dividends, which are typically higher than the rates for may have access to dividends and long-term capital gains.
Holding REITs in tax-advantaged accounts like IRAs or 401(k)s avoids this tax hit entirely, since those accounts defer or eliminate tax on distributions.
Some REIT dividends may include a small return-of-capital component, which is reported separately and reduces your cost basis rather than being taxed when ready.

Why the IRS treats REIT income differently from stock dividends

The may have access to dividend rate exists to encourage long-term stock ownership. When a corporation earns profit and pays it out as a dividend, that profit was already taxed at the corporate level. The may have access to rate is meant to avoid double taxation. But REITs are structured as pass-through entities — they do not pay corporate income tax. Instead, they pass income directly to shareholders, who pay tax on it once, at the individual level.

Because REIT income has not been taxed at a corporate level, Congress decided not to extend the may have access to dividend rate to REIT distributions. The income flows through to you untaxed at the entity level, so it makes sense to tax it fully at the individual level. This is the same logic that applies to partnerships, S corporations, and other pass-through structures.

Additionally, much of a REIT's income comes from sources that would never may have access to for the lower dividend rate anyway — mortgage interest paid by tenants, depreciation recapture, and gains from property sales. These are ordinary income by nature, and the IRS does not separate them out. Your entire REIT dividend is reported as ordinary income.

How to report REIT dividends on your tax return

Your brokerage will send you a Form 1099-DIV for each REIT that paid you a dividend during the year. Look at Box 1a, labeled "Ordinary Dividends." That is where REIT dividends appear. Do not look for them in Box 1b (may have access to Dividends) — they will not be there, even if you held the shares for five years.

You report the amount from Box 1a on Schedule B (Interest and Ordinary Dividends) if your total dividends and interest exceed $1,500. If your total is $1,500 or less, you can report it directly on Form 1040, line 5b. The amount is added to your other ordinary income and taxed at your marginal rate.

If you received REIT dividends from multiple sources, add all the Box 1a amounts together. That total goes on your return as ordinary dividend income. Keep your 1099-DIVs with your tax records in case the IRS asks questions later.

Return-of-capital distributions from REITs

Some REIT dividends include a return-of-capital component. This is not income — it is a return of your own money. Your brokerage reports this separately on Form 1099-DIV, Box 2a. Return-of-capital distributions are not taxed in the year you receive them. Instead, they reduce your cost basis in the REIT shares.

For example, if you bought 100 shares of a REIT for $50 per share (cost basis of $5,000) and received a $500 return-of-capital distribution, your new cost basis becomes $4,500. When you eventually sell the shares, you will owe tax on a larger gain because your basis is lower. The tax is deferred, not eliminated.

Return-of-capital distributions are less common than ordinary dividends, but they do occur. Make sure you adjust your cost basis records when you receive them. If you do not, you may underreport your gain when you sell, which can trigger an IRS notice.

REIT dividends in taxable accounts versus retirement accounts

The ordinary income tax treatment of REIT dividends makes them particularly tax-inefficient in a regular brokerage account. If you are choosing between holding REITs and other dividend-paying stocks, consider holding the REITs in a tax-advantaged account instead.

In a traditional IRA or 401(k), REIT dividends are not taxed when you receive them. You pay tax only when you withdraw money from the account in retirement. In a Roth IRA or Roth 401(k), REIT dividends are never taxed, as long as you follow the withdrawal rules. This shelters you from the ordinary income rate entirely.

If you must hold REITs in a taxable account, be aware that your after-tax return will be lower than it appears on paper. A REIT paying 4 percent annually will net you roughly 3 percent after ordinary income tax if you are in the 24 percent bracket. A stock paying the same 4 percent dividend, taxed at the may have access to rate, would net you closer to 3.4 percent. Over decades, that difference compounds.

State and local taxes on REIT dividends

REIT dividends are also subject to state and local income tax in most states. Unlike may have access to dividends, which some states tax at a lower rate, REIT dividends are taxed as ordinary income at your state's regular rate. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax, so this does not explore there. But in states with income tax, expect to pay both federal and state tax on REIT dividends at your ordinary income rate.

If you live in a state with a high income tax rate, this makes the tax inefficiency of holding REITs in a taxable account even more pronounced. A resident of California, for example, faces a combined federal and state ordinary income tax rate that can exceed 40 percent on REIT dividends, compared to roughly 20 percent on may have access to dividends.

Frequently Asked Questions

Can REIT dividends ever be taxed as may have access to dividends?

No. The tax code does not allow REIT dividends to be taxed as may have access to dividends under any circumstances. Even if you held the REIT shares for 10 years, the dividend is still ordinary income. This is a permanent feature of how REITs are taxed, not something that changes based on your holding period.

What if my REIT dividend includes a capital gain distribution?

Some REITs distribute long-term capital gains they realized from selling properties. These appear in Box 2b of your 1099-DIV and are taxed as long-term capital gains, not ordinary income. This is the one exception to the ordinary income rule, but it is separate from the ordinary dividend portion. Your 1099-DIV will break out each component.

Do I owe tax on REIT dividends if I reinvest them?

Yes. Reinvesting dividends does not change when you owe tax. Whether you take the cash or use it to buy more shares, you owe tax on the full dividend amount in the year you received it. The reinvestment is a separate transaction that happens after tax is due.

How do I know if a distribution is return-of-capital or ordinary dividend?

Your brokerage statement and Form 1099-DIV will separate them. Box 1a shows ordinary dividends. Box 2a shows return-of-capital. If you are unsure, contact your brokerage — they have the official breakdown. Do not guess, because the two are taxed differently.

Should I avoid REITs because of the tax treatment?

Not necessarily. REITs serve a purpose in a diversified portfolio by providing real estate exposure and income. The tax inefficiency is real, but it can be managed by holding REITs in retirement accounts where possible. If you must hold them in a taxable account, factor the tax cost into your expected return, but do not let taxes alone drive your investment decisions.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.