REIT Dividend Tax Treatment

Real Estate Investment Trust (REIT) dividends receive special but complex tax treatment. Understanding these rules helps investors optimize after-tax returns and properly locate REIT holdings across account types.

Why REIT Dividends Differ

REITs avoid corporate tax by distributing 90%+ of income to shareholders. This "pass-through" structure means investors receive income that wasn't taxed at the corporate level - so it's taxed fully at the individual level.

Tax Components of REIT Dividends

REIT distributions typically contain multiple components:

1. Ordinary Income (largest portion): Taxed at your marginal income tax rate (up to 37%) 2. Qualified Dividends (sometimes): Small portion may qualify for lower capital gains rates 3. Return of Capital: Not immediately taxable; reduces cost basis 4. Capital Gains: Taxed at capital gains rates when fund sells properties at profit

The 199A Deduction (Section 199A)

The Tax Cuts and Jobs Act of 2017 created a powerful benefit for REIT investors:

• Deduct 20% of qualified REIT dividends from taxable income
• Applies to ordinary income portion only
• No wage or capital limitations (unlike pass-through business deduction)
• Available through 2025 (unless extended by Congress)

Practical Impact

For someone in the 32% tax bracket:

• Without 199A: $100 REIT dividend = $32 tax
• With 199A: $80 taxable ($100 - 20%) = $25.60 tax
• Effective rate drops from 32% to 25.6%

Account Placement Strategy

Tax-Advantaged Accounts (IRA, 401k):

• Pros: Shelter high ordinary income from tax
• Cons: Lose 199A deduction benefit

Taxable Accounts:

• Pros: Capture 199A deduction, return of capital benefits
• Cons: Ordinary income still taxed annually

Best Practice: Model both scenarios based on your specific holdings and tax situation.