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 held in a regular brokerage account receive preferential tax treatment called may have access to dividend status, which means they are taxed at lower capital gains rates (0%, 15%, or 20% depending on your income). REIT dividends do not may have access to for this treatment. Instead, the IRS treats REIT dividends as ordinary income, taxed at your regular income tax rate, which can be as high as 37% for the highest earners.

This distinction matters because it directly affects how much of your REIT dividend you keep after taxes. A may have access to dividend taxed at 15% leaves you with more money than an ordinary dividend taxed at your marginal rate. If you are in the 24% tax bracket, for example, a $1,000 may have access to dividend costs you $150 in federal tax, while a $1,000 REIT dividend costs you $240.

The reason REIT dividends receive this treatment is structural: REITs are required by law to distribute at least 90% of their taxable income to shareholders, and that income comes from rental revenue and property sales rather than from the kinds of corporate profits that normally generate may have access to dividends. The IRS treats REIT payouts more like partnership distributions than stock dividends.

Key Takeaways

REIT dividends are taxed as ordinary income at your marginal tax rate, not at the lower may have access to dividend rates of 0%, 15%, or 20%.
Your brokerage will report REIT dividends on Form 1099-DIV in the ordinary dividend box, not the may have access to dividend box, and you report them on your tax return as regular income.
Some REIT dividends may include a small portion of return of capital, which is not taxed in the year received but reduces your cost basis in the REIT shares instead.
Holding REITs in a tax-deferred account like an IRA or 401(k) shields you from the ordinary income tax on dividends, making these accounts a tax-efficient place for REIT holdings.

Why the IRS treats REIT dividends differently

The tax code requires REITs to distribute nearly all of their taxable income to shareholders each year. That income comes from rents, property management fees, and gains on property sales—not from corporate earnings in the traditional sense. Because REITs function more like pass-through entities than regular corporations, the IRS does not extend may have access to dividend status to their distributions.

Additionally, a portion of a REIT dividend may be classified as a return of capital rather than a dividend. This happens when the REIT distributes more cash than it earned in taxable income during the year. Return of capital is not taxed when you receive it; instead, it reduces your cost basis (the amount you paid for the shares). This adjustment means you will owe capital gains tax on a larger gain when you eventually sell the shares, so the tax is deferred rather than eliminated.

Your brokerage will break down the composition of each REIT dividend on Form 1099-DIV, showing how much is ordinary income, how much (if any) is return of capital, and whether any portion qualifies as a capital gain distribution. Read this form carefully, because the tax treatment of each piece differs.

How to report REIT dividends on your tax return

REIT dividends appear on Form 1099-DIV, which your brokerage sends to you and the IRS by January 31 each year. The ordinary dividend portion goes in Box 1a. You report this amount on Schedule B (Interest and Ordinary Dividends) if your total dividends and interest exceed $1,500, or directly on Form 1040 if they do not. Either way, the amount is added to your other income and taxed at your marginal rate.

If the REIT paid a capital gain distribution—which some REITs do when they sell properties at a profit—that appears in Box 2a or 2b of Form 1099-DIV and is reported on Schedule D (Capital Gains and Losses). Capital gain distributions are taxed at capital gains rates (0%, 15%, or 20%), which is more favorable than ordinary income rates, though still different from may have access to dividends on regular stocks.

Return of capital does not appear as a separate line on Form 1099-DIV; instead, your brokerage may note it in a supplemental statement or in the account records. You do not report it as income, but you must reduce your cost basis in the REIT shares by that amount. If you fail to do this, you will overstate your cost basis and understate your capital gain when you sell, which can trigger an audit.

The tax advantage of holding REITs in retirement accounts

Because REIT dividends are taxed as ordinary income, they are particularly tax-inefficient in a regular taxable brokerage account. A practical strategy is to hold REITs inside a tax-deferred account such as a traditional IRA, Roth IRA, or 401(k). Inside these accounts, REIT dividends accumulate without triggering any tax until you withdraw the money (or never, in the case of a Roth).

This approach is especially valuable if you reinvest REIT dividends to buy more shares. In a taxable account, you owe tax on the dividend in the year it is paid, even though you did not take the cash out. In a retirement account, the dividend is reinvested tax-free, and you only pay tax (if at all) when you withdraw from the account decades later.

If you have limited space in retirement accounts, prioritize REITs there and hold more tax-efficient investments—such as index funds that generate mostly may have access to dividends or long-term capital gains—in your taxable account.

Return of capital and its effect on your cost basis

Some REIT dividends include a return of capital component, which means the REIT is distributing cash that was not earned as taxable income in that year. This can happen when a REIT has depreciation deductions (which reduce taxable income but not cash) or when it is drawing down reserves.

Return of capital is not taxed when you receive it, but it reduces your cost basis dollar-for-dollar. If you bought 100 REIT shares for $50 per share (cost basis of $5,000) and received $500 in return of capital, your new cost basis becomes $4,500. When you eventually sell those shares, you will owe capital gains tax on a larger gain because your basis is lower.

Your brokerage should track this adjustment automatically in your account, but it is worth verifying, especially if you have held the REIT for many years and received multiple distributions. If your brokerage does not track it, you will need to do so manually and provide documentation to the IRS if questioned.

Comparing REIT dividends to may have access to dividends from regular stocks

The tax difference between REIT dividends and may have access to dividends can be substantial over time. Assume you are in the 24% federal tax bracket and receive $10,000 in annual dividends. If those dividends are may have access to, you owe $1,500 in federal tax (15% rate). If they are REIT dividends taxed as ordinary income, you owe $2,400 (24% rate). Over 20 years, that difference compounds significantly, especially if you reinvest the after-tax proceeds.

This does not mean REITs are a bad investment—they serve a purpose in a diversified portfolio by providing real estate exposure and often higher yields than stocks. But it does mean you should be intentional about where you hold them. The tax drag of ordinary income taxation is one reason financial advisors often recommend holding REITs in retirement accounts and holding dividend stocks in taxable accounts.

Some investors also use tax-loss harvesting with REITs: if a REIT declines in value, you can sell it to realize a capital loss, which offsets other capital gains or up to $3,000 of ordinary income. You can then buy a similar (but not identical) REIT to maintain your real estate exposure. This strategy is not available with may have access to dividends themselves, but it can help offset the ordinary income tax on REIT dividends over time.

Frequently Asked Questions

Can any part of a REIT dividend be taxed as a may have access to dividend?

No. The ordinary dividend portion of a REIT distribution is always taxed as ordinary income. However, if a REIT pays a capital gain distribution (from selling properties at a profit), that portion is taxed at capital gains rates, which is more favorable than ordinary income rates but still not the same as may have access to dividend treatment on regular stocks.

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

Yes. In a taxable account, you owe tax on REIT dividends in the year they are paid, regardless of whether you take the cash or reinvest it. In a tax-deferred retirement account, you owe no tax until you withdraw money from the account.

What is return of capital, and do I report it on my tax return?

Return of capital is a distribution of cash that was not earned as taxable income. You do not report it as income on your tax return, but you must reduce your cost basis in the REIT shares by that amount. Your brokerage should track this, but verify it in your account records.

Should I avoid REITs because of the tax treatment?

Not necessarily. REITs serve a purpose in a diversified portfolio. The key is to hold them in tax-deferred accounts (IRAs, 401(k)s) where possible, and to hold more tax-efficient investments in taxable accounts. This strategy minimizes the tax drag without eliminating REITs from your portfolio.

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.