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

REIT dividends do not may have access to for the lower tax rates that apply to most stock dividends

When you own shares in a Real Estate Investment Trust (REIT), the dividends you receive are taxed as ordinary income at your full tax rate, not at the preferential rates available for may have access to dividends. This is true regardless of how long you have held the REIT shares. The IRS treats REIT dividends differently because REITs are required by law to distribute most of their taxable income to shareholders, and that income comes from rental revenue and property sales rather than from corporate profits.

The tax code creates this distinction intentionally. may have access to dividends — the lower-taxed kind — come from C corporations that have already paid corporate tax on their earnings. REIT dividends represent income that has not yet been taxed at the corporate level, so the tax system does not grant them the same preferential treatment. Your REIT will report these dividends on Form 1099-DIV each January, and you report them on your tax return as ordinary income.

Key Takeaways

REIT dividends are always taxed as ordinary income, even if you held the shares for years, because REITs are structured to pass income directly to shareholders without corporate-level taxation.
Your REIT will send you a Form 1099-DIV each year showing the total dividends paid, which you report on your tax return at your ordinary income tax rate.
Some REIT dividends may be designated as capital gain distributions, which do receive preferential tax treatment, but the REIT will specify this on the 1099-DIV.
The difference between ordinary and may have access to dividend rates can be substantial — ordinary income is taxed at rates up to 37 percent, while may have access to dividends top out at 20 percent.

Why REIT dividends receive ordinary income treatment

A REIT is a legal structure that allows investors to own real estate without buying property directly. In exchange for this convenience, REITs must follow strict rules: they must own real estate or real estate debt, they must distribute at least 90 percent of their taxable income to shareholders each year, and they cannot pay corporate income tax on that distributed income. Because the REIT itself does not pay tax, the income flows through to you as the shareholder without the corporate-level tax that would normally apply to stock dividends.

may have access to dividends exist because corporations pay tax first, then distribute what remains. The preferential tax rate on may have access to dividends is meant to avoid double taxation. REIT dividends skip that first layer of corporate tax entirely by design, so they do not receive the same tax preference. The IRS views REIT dividends as a direct pass-through of rental income and property gains, similar to income from a partnership or S corporation.

What Form 1099-DIV tells you about your REIT income

Your REIT will send you a Form 1099-DIV in January showing how much you received in dividends during the previous year. This form breaks down the income into categories, and the category matters for your taxes. Most REIT dividends appear in Box 1a (ordinary dividends), which you report as ordinary income. Some REITs also pay capital gain distributions — profits from selling properties — which appear in Box 2a (long-term capital gains) and receive the preferential tax rate.

Read the 1099-DIV carefully, because not all REIT income is taxed the same way. If your REIT paid a return of capital — a distribution of your own money back to you rather than earnings — that appears separately and reduces your cost basis in the shares rather than creating a tax bill. The REIT is required to explain which dividends are ordinary income and which are capital gains, so you do not have to guess.

The tax rate difference between ordinary and may have access to dividends

Ordinary income, including REIT dividends, is taxed at your marginal tax rate. For 2024, those rates range from 10 percent to 37 percent depending on your income level and filing status. may have access to dividends, by contrast, are taxed at a maximum of 20 percent, with most taxpayers paying either 0 percent or 15 percent. The gap can be significant: a high-income taxpayer in the 37 percent bracket pays nearly twice as much tax on ordinary REIT dividends as on may have access to dividends from a regular stock.

This difference is one reason some investors choose to hold REITs in tax-deferred accounts like IRAs or 401(k)s, where the tax treatment of dividends does not matter. Inside those accounts, all dividends grow without immediate tax consequences. In a regular taxable account, the ordinary income treatment of REIT dividends makes them less tax-efficient than stocks that pay may have access to dividends.

When REIT dividends might receive capital gains treatment

Not every payment from a REIT is an ordinary dividend. When a REIT sells a property at a profit, it must distribute that gain to shareholders. These capital gain distributions are reported separately on the 1099-DIV and taxed as long-term capital gains, which means they receive the preferential tax rate. The REIT will specify on the form which portion of your dividends came from capital gains versus ordinary rental income.

Capital gain distributions are less common than ordinary dividends because most REITs focus on collecting rent rather than buying and selling properties. However, some REITs are more active traders, and in years when they sell properties at significant gains, a larger portion of your distribution may may have access to for capital gains treatment. Always check Box 2a on your 1099-DIV to see whether any of your REIT income received this better tax treatment.

Holding REIT shares in tax-advantaged accounts

Because REIT dividends are taxed as ordinary income, they are particularly tax-inefficient in a regular brokerage account. Many investors choose to hold REITs inside IRAs, 401(k)s, or other tax-deferred retirement accounts instead. Inside these accounts, dividends are not taxed when received, and you do not owe tax until you withdraw money in retirement. This strategy lets the full dividend amount compound without annual tax drag.

If you do hold REITs in a taxable account, you will owe tax on the dividends each year regardless of whether you reinvest them or take them as cash. There is no way to defer or reduce the tax on ordinary REIT dividends in a taxable account — you report them on your return and pay at your ordinary income rate. This is one reason financial advisors often recommend reserving taxable accounts for stocks that pay may have access to dividends or no dividends at all.

How to report REIT dividends on your tax return

When you file your tax return, you report REIT dividends 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. The amount comes from Box 1a of your 1099-DIV. You do not have the option to treat REIT dividends as may have access to dividends — the tax code does not allow it, and the IRS will reject any attempt to do so.

If your REIT paid capital gain distributions, those go on Schedule D (Capital Gains and Losses) along with any other long-term capital gains you had during the year. Keep your 1099-DIV forms for at least three years in case the IRS asks questions about your reported income. If you received a 1099-DIV with an error, contact the REIT directly to request a corrected form.

Frequently Asked Questions

Can I ever get may have access to dividend treatment on REIT dividends?

No. The tax code specifically excludes REIT dividends from may have access to dividend treatment. Only capital gain distributions from a REIT receive preferential tax rates. If you see a 1099-DIV showing REIT dividends in the may have access to dividend box, contact the REIT to request a corrected form.

What if I held my REIT shares for more than a year?

The holding period does not matter for REIT dividends. Even if you owned the shares for decades, ordinary REIT dividends are still taxed as ordinary income. The holding period rule applies to may have access to dividends from regular stocks, not to REITs.

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

Yes. You owe tax on REIT dividends in the year you receive them, whether you take the money as cash or reinvest it in more shares. The tax is based on the amount of the dividend, not on whether you actually received the cash.

Why would anyone buy a REIT if the dividends are taxed so heavily?

REITs can offer higher dividend yields and real estate exposure that stocks do not provide. Many investors hold them in tax-deferred accounts where the tax treatment does not matter. Others accept the ordinary income tax in exchange for diversification or the specific properties the REIT owns.

If a REIT paid a return of capital, do I still owe tax on it?

No. A return of capital is not taxable in the year you receive it. Instead, it reduces your cost basis in the shares, which means you will owe more tax when you eventually sell. The 1099-DIV will show this separately from ordinary dividends.

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.