REIT dividends are taxed as ordinary income, not as may have access to dividends

Most dividends from stocks you own are taxed at lower rates if you hold them long enough — these are called may have access to dividends. REIT dividends do not get this treatment. The IRS taxes nearly all REIT dividends as ordinary income, which means they are taxed at your regular income tax rate, the same rate as your wages or salary.

This matters because the difference between ordinary income rates and may have access to dividend rates can be substantial. If you are in the 24% tax bracket, may have access to dividends might be taxed at 15%. REIT dividends in your hands would be taxed at 24%. Over time, this adds up, especially if you hold REITs in a taxable account rather than a retirement account.

The reason is structural: REITs are required by law to distribute at least 90% of their taxable income to shareholders. That income comes from rent, property sales, and other operations — not from capital gains. The IRS treats these distributions as ordinary income to match how the REIT earned it.

Key Takeaways

  • REIT dividends are taxed as ordinary income at your full tax rate, not at the lower may have access to dividend rate that applies to most stock dividends.
  • A small portion of a REIT dividend may be taxed as a capital gain or return of capital, but the majority is ordinary income.
  • Holding a REIT in a tax-deferred account like an IRA or 401(k) shields you from this tax treatment in the year you receive the dividend.
  • The tax difference between REIT dividends and may have access to dividends can be 9 percentage points or more, depending on your tax bracket.

Why REITs do not may have access to for the lower dividend tax rate

The lower tax rate for may have access to dividends applies to dividends paid by corporations from their profits. The IRS assumes these profits were already taxed at the corporate level, so it taxes the dividend to you at a reduced rate to avoid double taxation.

REITs work differently. They are structured to avoid corporate-level taxation entirely. In exchange, they must distribute 90% of their taxable income directly to shareholders. Because the REIT itself pays no corporate tax, there is no "already taxed" income to give preferential treatment. The IRS taxes the full distribution to you as ordinary income instead.

This is true even if the REIT owns stocks that pay may have access to dividends. The REIT receives those may have access to dividends, but when it passes them through to you, they become ordinary income in your hands. The pass-through structure does not preserve the may have access to status.

What portion of a REIT dividend might be taxed differently

Most of your REIT dividend is ordinary income, but not all of it. Your REIT will send you a Form 1099-DIV each January that breaks down the dividend into categories. Understanding these categories helps you report the dividend correctly on your tax return.

The largest portion is usually ordinary income dividends — this is taxed at your full rate. A smaller portion may be capital gain distributions, which are taxed at the lower capital gains rate (0%, 15%, or 20%, depending on your bracket). Some REITs also make return of capital distributions, which reduce your cost basis in the REIT rather than being taxed as income in that year.

The exact breakdown varies by REIT and by year. A REIT that sells properties at a gain will have more capital gain distributions. A REIT that focuses on steady rental income will have mostly ordinary income. Your Form 1099-DIV will show the exact amounts for your tax return.

How to report REIT dividends on your tax return

REIT dividends go on Schedule B (Interest and Ordinary Dividends) or Schedule 1 (Additional Income), depending on the total amount and your filing status. The ordinary income portion is added to your other income and taxed at your marginal rate. The capital gain portion goes on Schedule D (Capital Gains and Losses) and is taxed at capital gains rates.

If you use tax software, it will usually import the Form 1099-DIV directly from your brokerage and place each amount in the correct location. If you file by hand, match the line numbers on the 1099-DIV to the corresponding lines on your return. The brokerage or REIT will provide instructions on the form itself.

Keep your 1099-DIV with your tax records. If you own the REIT in multiple accounts or at multiple brokerages, you will receive a separate 1099-DIV for each one. Add all the ordinary income amounts together and all the capital gain amounts together before reporting.

Tax-advantaged accounts shield REIT dividends from current taxation

If you hold a REIT inside a traditional IRA, Roth IRA, or 401(k), you do not pay tax on the dividend in the year you receive it. The dividend stays inside the account and grows. This is one reason REITs are often recommended for retirement accounts — the ordinary income tax treatment is deferred or eliminated entirely.

In a traditional IRA or 401(k), you pay tax on the entire withdrawal when you take money out in retirement, at whatever rate applies then. In a Roth IRA, you pay no tax on the withdrawal at all, as long as you follow the withdrawal rules. Either way, you avoid the immediate tax hit from ordinary income treatment.

This does not mean you should own only REITs in retirement accounts. It means that if you are choosing between holding a REIT in a taxable account or a retirement account, the retirement account is usually the better choice from a tax perspective.

Comparing REIT dividends to stock dividends in taxable accounts

The tax difference between REITs and regular stocks is real and measurable. Assume you are in the 24% federal tax bracket and you receive $1,000 in dividends. If those dividends are may have access to, you owe $150 in federal tax (15% rate). If they are REIT dividends, you owe $240 (24% rate). That is $90 more on $1,000 in dividends.

Over a decade, if you receive $10,000 in REIT dividends and $10,000 in may have access to dividends, the tax difference could be $900 or more. This does not mean you should avoid REITs — they serve a purpose in a diversified portfolio — but it does mean you should be intentional about where you hold them.

Some investors use a strategy called tax-location optimization: they hold tax-inefficient investments like REITs in retirement accounts and hold tax-efficient investments like index funds in taxable accounts. This is not required, but it can reduce your total tax bill over time.

State and local taxes on REIT dividends

Federal income tax is not the only tax on REIT dividends. Most states tax ordinary income dividends at their state income tax rate as well. A few states (like Florida, Texas, and Wyoming) have no state income tax, so REIT dividends are taxed only at the federal level.

If you live in a state with income tax, add that rate to the federal rate to see your true tax cost. In California, for example, the top state rate is 13.3%. Combined with the top federal rate of 37%, a high-income earner could pay 50.3% in income tax on REIT dividends. Capital gains are often taxed at lower state rates, which makes the difference between REIT dividends and may have access to dividends even larger in high-tax states.

Some states also tax capital gains at a different rate than ordinary income, or tax them only if they exceed a certain threshold. Check your state's tax rules to understand the full picture for your situation.

Frequently Asked Questions

Can a REIT dividend ever be taxed as a may have access to dividend?

No. The IRS treats REIT dividends as ordinary income by default. A small portion may be taxed as capital gains if the REIT sold properties at a profit, but the bulk of the dividend will always be ordinary income. This is built into how REITs are structured and taxed.

Do I have to hold a REIT for a certain time to get a lower tax rate?

No. The holding period rules that apply to may have access to dividends do not apply to REITs. Even if you hold a REIT for years, the dividend is still taxed as ordinary income. Holding it longer does not change the tax treatment.

What is a return of capital distribution, and how is it taxed?

A return of capital is a distribution that gives you back part of your original investment rather than paying you income. It is not taxed in the year you receive it. Instead, it reduces your cost basis (the amount you paid for the REIT). When you eventually sell the REIT, your gain or loss is calculated using the reduced basis, which may increase your taxable gain at that time.

Should I avoid REITs because of the tax treatment?

Not necessarily. REITs provide real estate exposure and often pay higher dividends than stocks. If you hold them in a retirement account, the tax treatment does not matter. If you hold them in a taxable account, the tax cost is real but may be worth it if the REIT fits your investment goals. Consider your overall portfolio and account structure.

How do I know what portion of my REIT dividend is ordinary income versus capital gains?

Your brokerage or the REIT will send you a Form 1099-DIV in January. This form breaks down the dividend into ordinary income, capital gains, and return of capital. Use these amounts when you file your tax return. If you do not receive a 1099-DIV, contact your brokerage or the REIT directly.