How REIT Dividends Are Taxed on Your Tax Return

REIT dividends are taxed as ordinary income, not capital gains, and the tax rate depends on what type of income the REIT paid out

When you own shares in a Real Estate Investment Trust, the dividends you receive are taxed differently than dividends from regular stocks. Most REIT dividends are taxed at your ordinary income tax rate — the same rate as your salary or wages — rather than at the lower capital gains rate. This matters because it can significantly increase what you owe at tax time.

The tax treatment depends on which of three categories the dividend falls into: ordinary income, capital gains, or return of capital. Your REIT will send you a Form 1099-DIV in January showing how much you received in each category. You report each type on a different line of your tax return, and each is taxed differently.

Key Takeaways

Most REIT dividends are taxed as ordinary income at your full tax bracket rate, not at the preferential capital gains rate.
Your REIT sends a Form 1099-DIV that breaks down dividends into ordinary income, capital gains, and return of capital — each taxed separately.
Return of capital dividends are not taxed in the year you receive them, but they reduce your cost basis and create a larger taxable gain when you sell.
If you hold REIT shares in a tax-deferred account like an IRA or 401(k), you pay no tax on the dividends until you withdraw money from that account.

Why REIT dividends are taxed as ordinary income

REITs are required by law to distribute at least 90 percent of their taxable income to shareholders. Because that income comes from rents, property sales, and mortgage interest — not from capital appreciation of the REIT's stock price — it is treated as ordinary income for tax purposes. The IRS does not grant it the preferential treatment it gives to may have access to dividends from corporations.

This is the single biggest tax difference between REIT dividends and stock dividends. If you own Apple stock and receive a dividend, that dividend may may have access to for the long-term capital gains rate, which ranges from 0 to 20 percent depending on your income. A REIT dividend, by contrast, is taxed at your ordinary income rate, which can be as high as 37 percent. For someone in the 24 percent tax bracket, this difference means paying roughly 4 percentage points more in federal tax on every dollar of REIT dividend income.

Reading your Form 1099-DIV to identify each type of dividend

In January, your REIT or brokerage sends you a Form 1099-DIV. This form has multiple boxes, and the box number tells you how to treat each dividend on your tax return. Box 1a shows ordinary dividends — the largest portion for most REITs. Box 2a shows capital gain distributions. Box 3 shows nondividend distributions, also called return of capital.

The form also shows the total you received in each category. If you owned the REIT for only part of the year, the 1099-DIV reflects only the dividends paid while you held it. If you sold the REIT mid-year, you may receive a 1099-DIV showing dividends through the sale date, and your brokerage statement will show the sale proceeds separately.

Keep the 1099-DIV with your tax records. You will need it to fill out Schedule B (Interest and Ordinary Dividends) or Schedule D (Capital Gains and Losses), depending on the amounts involved. If the total dividends and interest you received are under $1,500, you may be able to report them directly on Form 1040 without a schedule.

Ordinary income dividends and how to report them

Ordinary income dividends from a REIT are reported on Schedule B, Part I, or directly on Form 1040 line 5b if your total may have access to dividends and interest are under $1,500. You add this amount to your wages, self-employment income, and any other ordinary income to arrive at your total taxable income. It is then taxed at your marginal tax rate — the rate for your highest bracket.

If you received more than $1,500 in total dividends and interest combined, you must use Schedule B. The form is straightforward: you list the REIT name, the amount from Box 1a of the 1099-DIV, and add up all your ordinary dividends. The total goes to Form 1040.

There is no special deduction or credit for REIT dividends. Unlike may have access to dividends from stocks, you cannot use the preferential capital gains rates. This is why holding REITs in tax-deferred accounts (discussed below) is often more tax-efficient than holding them in a regular brokerage account.

Capital gain distributions and return of capital

Some REITs also distribute capital gains — profits from selling properties or other assets at a gain. These appear in Box 2a of your 1099-DIV. Capital gain distributions are taxed at capital gains rates, which are lower than ordinary income rates. However, they are still reported separately from ordinary dividends, on Schedule D (Capital Gains and Losses) rather than Schedule B.

Return of capital is different from both ordinary income and capital gains. It appears in Box 3 of your 1099-DIV and represents a return of your own investment, not earnings. In the year you receive it, you do not pay tax on return of capital. Instead, it reduces your cost basis — the amount you originally paid for the shares. When you eventually sell the REIT, your cost basis is lower, which means your taxable gain is higher. You pay the tax later, at capital gains rates, rather than now at ordinary income rates.

Return of capital is common in REITs that are in their early years or that prioritize distributions over growth. If a REIT pays out more in return of capital than your original investment, the excess is treated as a capital gain in the year it occurs. Your 1099-DIV will show this separately.

Holding REITs in tax-deferred accounts to reduce tax burden

Because REIT dividends are taxed as ordinary income, they are an ideal holding for tax-deferred accounts like traditional IRAs, 401(k)s, and 403(b)s. Inside these accounts, you receive the dividend and it compounds without triggering any tax. You pay tax only when you withdraw money from the account — and then at your ordinary income rate at that time, not at the rate in effect when the dividend was paid.

This strategy is especially valuable if you are in a high tax bracket now but expect to be in a lower bracket in retirement. By holding REITs in a traditional IRA or 401(k), you defer the ordinary income tax until you are retired and potentially in a lower bracket. If you hold REITs in a Roth IRA, you pay no tax on the dividends or the eventual withdrawal, as long as you follow the withdrawal rules.

In contrast, holding REITs in a regular taxable brokerage account means you pay ordinary income tax on every dividend in the year you receive it, even if you reinvest the dividend and do not spend it. This is why financial advisors often recommend using tax-deferred space for REITs first, before buying them in taxable accounts.

Reporting REIT dividends on your tax return

The exact form you use depends on the total amount of dividends and interest you received and whether any of your dividends are capital gains. If your total dividends and interest are under $1,500 and none are capital gains, you can report them directly on Form 1040 line 5b. If they are $1,500 or more, or if you have capital gain distributions, you must use Schedule B and possibly Schedule D.

Start by gathering all your 1099-DIVs. Add up all the ordinary income dividends (Box 1a) from all your REITs and other investments. Add up all the capital gain distributions (Box 2a). Add up all the return of capital amounts (Box 3). Then enter each total on the appropriate schedule or line of your return.

If you sold a REIT during the year, you will also receive a Form 1099-B showing the sale proceeds. This goes on Schedule D along with your cost basis and holding period to calculate your capital gain or loss. Return of capital reduces your cost basis, so if you received return of capital in prior years, your cost basis is lower than your original purchase price, which increases your taxable gain on the sale.

Common mistakes to avoid when reporting REIT dividends

The most common mistake is treating REIT dividends as may have access to dividends and trying to use the capital gains rate. REIT dividends do not may have access to for preferential rates unless they are specifically labeled as capital gain distributions on the 1099-DIV. If you see "ordinary dividends" in Box 1a, those are taxed at ordinary rates, period.

Another mistake is forgetting to reduce your cost basis when you receive return of capital. If you receive $500 in return of capital and later sell the REIT, you must subtract that $500 from your original purchase price before calculating your gain. Failing to do this understates your taxable gain and can trigger an audit if the IRS notices the discrepancy.

A third mistake is holding REITs in a taxable account when you have unused space in a 401(k) or IRA. Because REIT dividends are taxed as ordinary income every year, holding them in a tax-deferred account can save thousands in taxes over time. If you have both types of accounts, prioritize putting REITs in the tax-deferred space.

Frequently Asked Questions

Do I have to pay tax on REIT dividends if I reinvest them?

Yes. Whether you take the dividend as cash or reinvest it in more REIT shares, you owe tax on the full amount in the year you receive it. The IRS taxes dividends when they are paid to you, not when you spend them. Reinvestment does not defer the tax.

What is the difference between a REIT dividend and a capital gain from selling REIT shares?

A REIT dividend is income paid to you while you hold the shares; it is taxed as ordinary income. A capital gain is profit you make when you sell the shares for more than you paid for them; it is taxed at capital gains rates. They are separate transactions and reported on different parts of your tax return.

Can I deduct REIT dividend losses or investment expenses?

No. You cannot deduct losses on dividends you received, and you cannot deduct investment expenses like advisory fees or brokerage commissions as a deduction from REIT dividend income. If you sell REIT shares at a loss, you can deduct that capital loss, but only up to $3,000 per year against other income, with excess losses carried forward.

What happens to return of capital if I sell the REIT before my cost basis reaches zero?

Your cost basis is reduced by the return of capital, so your taxable gain on the sale is higher than it would have been without the return of capital. If you paid $10,000 for a REIT and received $2,000 in return of capital, your cost basis is now $8,000. If you sell for $9,000, your taxable gain is $1,000, not $0.

Do I report REIT dividends differently if I own them through a brokerage account versus directly?

No. Whether you own REIT shares directly or through a brokerage, mutual fund, or ETF, the tax treatment is the same. Your 1099-DIV will show the dividends you received, and you report them the same way on your tax return.

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.