REITs are taxed differently than stocks because they distribute most of their income to shareholders
A REIT (Real Estate Investment Trust) must pay out at least 90% of its taxable income to shareholders as dividends. That requirement is what makes REITs attractive — but it also means the tax burden falls on you, not the company. You pay ordinary income tax on those dividends, not the lower capital gains rate that applies to stock dividends. The REIT itself pays no federal tax on the income it distributes.
The practical result: REIT dividends are taxed as ordinary income at your marginal tax rate, which is typically higher than the 15% or 20% long-term capital gains rate. If you earn $60,000 a year and receive $2,000 in REIT dividends, that $2,000 is taxed at your ordinary income rate — potentially 22% or higher, depending on your bracket — not at the preferential capital gains rate.
You also owe tax on any gain when you sell REIT shares, just as you would with any stock. If you bought shares at $50 and sold them at $70, the $20 gain is a capital gain and taxed accordingly.
Key Takeaways
- REIT dividends are taxed as ordinary income at your full marginal rate, not at the lower capital gains rate that applies to stock dividends.
- The REIT itself pays no federal income tax because it distributes at least 90% of taxable income to shareholders, shifting the tax burden to you.
- You receive a Form 1099-DIV each year showing how much of your dividend came from ordinary income, capital gains, and return of capital, because each type is taxed differently.
- Gains when you sell REIT shares are taxed as capital gains, but the dividends you received along the way were taxed as ordinary income.
- Holding REITs in a tax-deferred account like an IRA or 401(k) can reduce the tax impact because dividends and gains grow without annual tax bills.
Why REIT dividends are taxed as ordinary income
REITs are required to distribute 90% of taxable income to shareholders. That income comes from rent, property sales, and other real estate operations — not from capital appreciation of the underlying properties. Because the REIT passes that operating income directly to you, it is taxed as ordinary income, the same way wages or interest are taxed.
This is different from stock dividends, which are often taxed at the preferential long-term capital gains rate of 15% or 20%. The difference matters. A $1,000 REIT dividend taxed at 24% costs you $240 in federal tax. A $1,000 stock dividend taxed at 15% costs you $150. Over time, that gap compounds.
The REIT structure exists because Congress wanted to make real estate investment accessible to ordinary people without creating a tax shelter for large corporations. The trade-off is that you, as the shareholder, bear the tax cost.
Understanding the Form 1099-DIV you receive
Each January, your REIT sends you a Form 1099-DIV that breaks down your dividend into categories. Not all of it is taxed the same way. The form shows ordinary income dividends, capital gain distributions, and return of capital — and each is handled differently on your tax return.
Ordinary income dividends are the largest portion for most REITs. These are taxed at your full marginal rate. Capital gain distributions are gains the REIT realized when it sold properties; these are taxed as long-term capital gains at the preferential rate (15% or 20% for most people). Return of capital is a return of your own money and is not taxed in the year you receive it — instead, it reduces your cost basis in the shares, which means you pay tax later when you sell.
The 1099-DIV tells you which box each dollar falls into. You report each category on Schedule B and Schedule D of your tax return. If you own multiple REITs, you will receive multiple 1099-DIVs, and the amounts add up across all of them.
How capital gains work when you sell REIT shares
When you sell REIT shares, you owe tax on the difference between what you paid and what you received, just as with any stock. If you bought 100 shares at $50 each ($5,000 total) and sold them at $70 each ($7,000 total), your gain is $2,000. That gain is taxed as a long-term capital gain if you held the shares for more than one year, or as a short-term capital gain (taxed at ordinary income rates) if you held them for one year or less.
The return of capital distributions you received over the years reduce your cost basis. If you received $500 in return of capital, your cost basis drops from $5,000 to $4,500. That means your gain on the sale would be $2,500 instead of $2,000. The tax is deferred, not eliminated.
Keep records of your purchase price, the date you bought, and all distributions you received. Your brokerage statement usually tracks cost basis automatically, but it is worth verifying, especially if you reinvested dividends or bought shares over time.
Tax-deferred accounts reduce the REIT tax burden
Holding REITs inside a traditional IRA, Roth IRA, or 401(k) eliminates the annual tax bill on dividends and defers (or eliminates) tax on gains. Because these accounts are tax-deferred or tax-free, the REIT's high dividend yield works in your favor instead of against it.
In a traditional IRA or 401(k), dividends and gains compound without triggering annual tax. You pay tax only when you withdraw money in retirement. In a Roth IRA, dividends and gains are never taxed, as long as you follow the withdrawal rules.
This is one reason financial advisors often recommend holding REITs in retirement accounts rather than in taxable brokerage accounts. The tax drag of ordinary income taxation is eliminated, and you keep more of the growth. If you have room in an IRA or 401(k), REITs are a natural fit there.
State and local taxes on REIT dividends
REIT dividends are also subject to state income tax in most states. If your state taxes ordinary income at 5% and you receive $2,000 in REIT dividends, you owe $100 in state tax on top of federal tax. A few states (Florida, Texas, Nevada, and others) have no state income tax, so residents there pay only federal tax on REIT dividends.
Some states tax capital gains differently than ordinary income, or tax them at a lower rate. Check your state's tax rules if you live in a state with income tax. The tax impact of REITs varies significantly by state, and it is worth factoring into your decision about where to hold them.
Frequently Asked Questions
Are REIT dividends taxed differently if I reinvest them?
No. Whether you take the dividend as cash or reinvest it in more shares, you owe the same tax in the year you receive it. Reinvestment does not defer the tax bill. You still report the full dividend amount on your tax return and pay tax on it, even though the money stayed invested.
What if a REIT pays a return of capital instead of a dividend?
Return of capital is not taxed in the year you receive it. Instead, it reduces your cost basis in the shares. When you eventually sell, your gain will be larger because your basis is lower. The tax is deferred, not forgiven. Over time, if return of capital exceeds your original investment, the excess is taxed as a capital gain.
Do I owe tax on REIT dividends if I hold them in a brokerage account but do not sell?
Yes. You owe tax on dividends every year you receive them, regardless of whether you sell the shares. The tax is due based on the dividend amount, not on any gain in the share price. This is why holding REITs in tax-deferred accounts is often more efficient.
Can I deduct REIT losses on my tax return?
If you sell REIT shares at a loss, you can use that loss to offset capital gains from other investments or up to $3,000 of ordinary income in a single year. Losses beyond that carry forward to future years. Keep records of your purchase price and sale price to document the loss.
How do I report REIT dividends if I own them through a mutual fund or ETF?
The mutual fund or ETF will send you a Form 1099-DIV showing the dividends it paid you. Those dividends may include ordinary income, capital gains, and return of capital from the underlying REITs, all bundled together. Report the total on your tax return as shown on the 1099-DIV.