REIT dividends are taxed as ordinary income, not capital gains, which usually means a higher tax rate than stock dividends

When you receive a dividend from a REIT (Real Estate Investment Trust), the IRS taxes it the same way it taxes wages or interest — at your ordinary income tax rate. This is different from dividends from regular corporations, which often may have access to for lower "may have access to dividend" rates. If you are in the 24% tax bracket, REIT dividends are taxed at 24%, not the 15% or 20% rate that applies to most stock dividends.

The tax bill arrives in the year you receive the dividend, regardless of whether you reinvest it or take the cash. If your REIT is held in a taxable brokerage account, you will owe tax on the full amount. If it is in a retirement account like an IRA or 401(k), you owe nothing until you withdraw money from that account.

Key Takeaways

  • REIT dividends are taxed at your ordinary income tax rate (10%, 12%, 22%, 24%, 32%, 35%, or 37%), not the lower capital gains rates that apply to stock dividends.
  • You owe tax on REIT dividends in the year you receive them if they are in a taxable account, even if you reinvest the money.
  • Some REIT dividends may be taxed differently — a small portion might may have access to as capital gains or return of capital — and your 1099-DIV form will break this down.
  • Holding REITs in tax-deferred accounts like IRAs or 401(k)s can reduce or eliminate the annual tax burden on dividends.
  • State and local income taxes also apply to REIT dividends in most states, on top of federal tax.

Why REIT dividends get ordinary income treatment

REITs are required by law to distribute at least 90% of their taxable income to shareholders. That income comes from rent, property sales, and mortgage interest — sources that the IRS treats as ordinary business income, not investment income. Because the REIT passes this income through to you, it retains the same tax character.

A regular corporation can keep its profits and reinvest them, so shareholders only pay tax on dividends when they choose to distribute them. A REIT has no choice — it must pay out most of what it earns. That mandatory distribution structure is why the tax treatment is different and usually less favorable to the investor.

How your tax bracket determines what you actually pay

The amount of tax you owe on a REIT dividend depends on your total income for the year and your filing status. The federal tax brackets for 2024 range from 10% to 37%. If you are single and earn $47,150 to $100,525, you are in the 22% bracket, so each dollar of REIT dividend is taxed at 22%. If you earn more, you move into higher brackets.

This is why the same REIT dividend can cost one person 12% in tax and another person 35% in tax. Your tax bill is not fixed — it depends on your total income that year. If you have a year with lower income, REIT dividends in that year will be taxed at a lower rate.

Self-employed people and business owners should also note that REIT dividends do not trigger self-employment tax. You owe income tax only, not the additional 15.3% that applies to business earnings.

What the 1099-DIV form tells you about different types of dividends

In January or February, your REIT will send you a 1099-DIV form that breaks down the dividend into categories. Most of it will be labeled "ordinary dividends" and taxed at your ordinary rate. But some REITs also distribute capital gains (profits from selling properties) or return of capital (a return of your own money, not earnings).

Capital gains on the 1099-DIV are taxed at the long-term capital gains rate (0%, 15%, or 20%, depending on income) if the REIT held the property for more than one year. Return of capital is not taxed in the year you receive it — instead, it reduces your cost basis in the REIT, which means you will owe more tax when you eventually sell.

The 1099-DIV will show you exactly which box each type of income falls into. Box 1a is ordinary dividends. Box 2a is long-term capital gains. Box 3 is return of capital. You report each type on the appropriate line of your tax return.

Tax-deferred accounts shield you from annual REIT dividend tax

If you hold a REIT inside a traditional IRA, Roth IRA, or 401(k), you owe no tax on the dividends in the year you receive them. The dividends accumulate inside the account tax-free. This is one of the main reasons financial advisors often recommend holding REITs in retirement accounts rather than in a regular taxable brokerage account.

With a traditional IRA or 401(k), you will owe tax when you withdraw money in retirement. With a Roth IRA, you owe no tax on withdrawals at all, as long as you follow the rules (age 59½ and the account has been open for five years). This makes a Roth IRA the most tax-efficient home for a REIT if you are young enough to benefit from decades of tax-free growth.

State and local taxes on top of federal tax

Most states tax REIT dividends as ordinary income, just as the federal government does. If you live in New York, California, or another state with income tax, you will owe state tax on top of federal tax. The state rate varies — New York's top rate is 10.9%, California's is 13.3% — but it applies to the full dividend amount.

A few states have no income tax (Florida, Texas, Wyoming, and others), so residents of those states owe only federal tax on REIT dividends. If you live in a state with income tax and own REITs in a taxable account, factor the state rate into your decision about whether to hold them in a retirement account instead.

How to report REIT dividends on your tax return

When you file your federal return, you will report REIT dividends on Schedule B (if you have less than $1,500 in dividends) or Schedule 1 and Schedule B (if you have more). The ordinary dividends go on line 5b of Schedule 1. Capital gains go on Schedule D. Return of capital does not go on your return at all — it just reduces your basis for future use.

Your brokerage or REIT company will send you the 1099-DIV, and you should keep it with your tax records. If you use tax software, it will usually import the information from the 1099-DIV automatically. If you work with a tax preparer, give them the form and they will place each amount in the correct box.

Frequently Asked Questions

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

Yes. The IRS taxes dividends in the year you receive them, whether you take the cash or reinvest it back into the REIT. Reinvestment does not defer or avoid the tax — it only changes what you do with the money after tax is owed.

Are REIT dividends taxed differently if I hold them for a long time?

No. The length of time you hold a REIT does not change how its ordinary dividends are taxed. They are always taxed as ordinary income. However, if you sell the REIT at a profit, that gain is taxed as a long-term capital gain if you held it for more than one year, which is a lower rate.

What is return of capital and why is it not taxed?

Return of capital means the REIT is paying you back some of your own money, not distributing earnings. It is not taxed in the year you receive it because you already paid tax on the money when you bought the REIT. Instead, it reduces your cost basis, so you will owe more tax when you sell.

Can I deduct REIT losses against my dividend income?

If you sell a REIT at a loss, you can use that loss to offset capital gains from other investments. You can also deduct up to $3,000 of net capital losses against ordinary income in a single year. Losses beyond that carry forward to future years.

Is there a way to reduce the tax on REIT dividends?

The most effective way is to hold REITs in a retirement account (IRA or 401(k)) where dividends grow tax-free. In a taxable account, you cannot reduce the tax rate itself, but you can offset REIT dividend income with capital losses from other investments or with certain deductions if you are self-employed.