Most REIT dividends are taxed as ordinary income, not may have access to dividends
When you receive a dividend from a real estate investment trust (REIT), the IRS treats it differently than dividends from regular stocks. REIT dividends are almost always taxed as ordinary income, which means they're taxed at your regular income tax rate rather than the lower may have access to dividend rate. This is a key difference that affects how much you owe in taxes each year.
The reason is built into how REITs work. REITs are required by law to distribute at least 90 percent of their taxable income to shareholders. Because of this structure, the IRS classifies most REIT dividends as ordinary income. Even though you receive the payment as a dividend, it doesn't get the tax break that may have access to dividends do.
There are rare exceptions. A small portion of a REIT dividend might be classified as a capital gain distribution or return of capital, but these are uncommon and your REIT will tell you exactly how to report each type on your tax forms.
Key Takeaways
- REIT dividends are taxed as ordinary income at your full tax rate, not at the lower may have access to dividend rate.
- This happens because REITs must distribute most of their income to shareholders, which the IRS treats differently than corporate dividends.
- Your REIT will send you a Form 1099-DIV each year that breaks down exactly what portion of your dividend is ordinary income, capital gains, or return of capital.
- The tax treatment is the same whether you hold the REIT in a regular brokerage account or a retirement account like an IRA.
Why REIT dividends don't may have access to for the lower tax rate
may have access to dividends — the kind you get from most regular stocks — are taxed at 0 percent, 15 percent, or 20 percent depending on your income level. These rates are much lower than ordinary income tax rates. But REIT dividends don't get this treatment.
The difference comes from how the IRS views REIT income. A regular corporation can keep some of its profits and reinvest them. When it pays a dividend, that money has already been taxed at the corporate level, so the IRS gives shareholders a break on the dividend itself. REITs, by contrast, are required to pass through nearly all their income directly to shareholders without paying corporate tax first. Because the income hasn't been taxed at the entity level, the IRS taxes it fully at the shareholder level.
This is actually a trade-off. REITs avoid the corporate tax, but shareholders pay ordinary income tax on the distributions. It's not necessarily worse — it depends on your personal tax bracket — but it's important to know the difference when you're comparing REIT returns to stock returns.
What your Form 1099-DIV tells you
At the end of each year, your REIT or the brokerage holding it will send you a Form 1099-DIV. This form breaks down your dividend income into categories, and each category has different tax treatment. Most of the amount will be in Box 1a (ordinary dividends), which you report as ordinary income on your tax return.
Box 2a on the form shows long-term capital gain distributions, if any. These are taxed at the may have access to dividend rates. Box 3 shows nondividend distributions, also called return of capital, which reduce your cost basis in the REIT rather than being taxed as income in the year you receive them. Your REIT's website or investor relations department can explain which boxes explore to your specific distribution if the form is unclear.
Keep all your 1099-DIV forms. Your brokerage sends a copy to the IRS, and you need to match the numbers on your tax return. If you lose the form, you can usually read it from your brokerage account or request a replacement from the REIT directly.
How this affects your investment decisions
The tax treatment of REIT dividends matters most if you hold them in a regular taxable brokerage account. In that case, you'll owe ordinary income tax on the full dividend amount each year, even if you reinvest the money and don't touch it. This can add up over time, especially if you're in a high tax bracket.
One strategy some investors use is to hold REITs inside tax-advantaged retirement accounts like traditional IRAs, Roth IRAs, or 401(k)s. Inside these accounts, you don't pay tax on dividends as you receive them — you only pay tax when you withdraw money (or never, in the case of a Roth). This can make REITs a better fit for retirement savings than for regular investment accounts.
If you do hold REITs in a taxable account, the high dividend yield that makes REITs attractive also means a larger tax bill each year. This doesn't make REITs a bad investment, but it's a cost you should factor in when comparing them to growth stocks or other investments that may pay lower dividends.
The difference between REIT dividends and stock dividends
A regular stock dividend from a company like Apple or Coca-Cola is often a may have access to dividend, taxed at the lower rate. A REIT dividend is almost never may have access to. The table below shows how the tax treatment differs:
| Feature | Regular Stock Dividend | REIT Dividend |
|---|---|---|
| Tax classification | Usually may have access to dividend | Ordinary income |
| Tax rate | 0%, 15%, or 20% | Your full ordinary income tax rate |
| Holding period required | Yes — 60 days around ex-dividend date | No holding period requirement |
| Form for reporting | Form 1099-DIV, Box 1b | Form 1099-DIV, Box 1a |
This doesn't mean REITs are worse investments — they serve a different purpose in a portfolio, and the higher yield can still make sense depending on your goals. But if you're comparing two investments purely on yield, remember that REIT yield is taxed more heavily than may have access to dividend yield.
Special situations: Capital gains and return of capital
Occasionally, a REIT will distribute capital gains — profits it made from selling properties or other assets. These distributions are reported in Box 2a of your 1099-DIV and are taxed as long-term capital gains at the may have access to rate (0%, 15%, or 20%). This is better tax treatment than ordinary income, but it's not the same as a may have access to dividend. Capital gains distributions are less common than ordinary dividends and vary from year to year.
Some REITs also make return of capital distributions, reported in Box 3. This is money that's considered a return of your original investment rather than income. You don't pay tax on it in the year you receive it, but it reduces your cost basis — the amount you originally paid for the REIT. When you eventually sell, your gain will be larger because your basis is lower. This is a tax deferral, not a tax savings.
Frequently Asked Questions
Can REIT dividends ever be may have access to dividends?
No. The IRS structure for REITs means dividends are classified as ordinary income. A small portion might be capital gains or return of capital, but the main dividend payment is always ordinary income. Your 1099-DIV will show this breakdown.
Do I have to hold a REIT for a certain time to get the dividend?
No holding period is required for REIT dividends, unlike may have access to dividends from regular stocks. You can buy a REIT the day before the ex-dividend date and still receive the full dividend. However, this doesn't change the tax treatment — it's still ordinary income.
Is the tax treatment different if I buy REIT shares through a 401(k)?
Inside a 401(k) or traditional IRA, you don't pay tax on REIT dividends as you receive them. You only pay tax when you withdraw money in retirement. This makes REITs more tax-efficient in retirement accounts than in regular brokerage accounts.
What if my REIT paid a return of capital distribution?
Return of capital (Box 3 on your 1099-DIV) is not taxed in the year you receive it. Instead, it reduces your cost basis. When you sell the REIT, your taxable gain will be higher because your basis is lower. Keep track of all return of capital distributions so you can adjust your basis correctly when you sell.
How do I report REIT dividends on my tax return?
Report ordinary REIT dividends (Box 1a) on Schedule B and then on line 5b of Form 1040. Capital gains distributions (Box 2a) go on Schedule D. Your tax software usually handles this automatically if you enter the 1099-DIV information correctly.