How Are REITs Taxed?

Understanding REIT distributions and federal tax reporting

REIT taxation depends on the character of a distribution, the account that holds the shares, and the shareholder's circumstances. A cash payment can contain ordinary dividends, capital gain distributions, or a return of capital. Those categories have different reporting rules, so the dividend amount alone does not determine the tax owed.

This guide explains the main federal rules for individual U.S. investors and separates shareholder taxation from the REIT's own tax treatment. It also covers retirement accounts and the limits of a federal overview. This guide is general information, not tax or legal advice.

Updated October 18, 2026

Why a REIT distribution can have different tax components

Apartment buildings with projecting balconies surrounding a cloudy blue sky — Rental income is one source of earnings for property-owning REITs.

A real estate investment trust can earn rental income, interest, and gains from selling investments. Its payments to shareholders do not necessarily receive one uniform tax classification. The federal treatment depends on the amounts reported as dividends, capital gains, and nondividend distributions, together with the shareholder's eligibility for particular deductions or rates. The company's distribution announcement and the cash credited to an account are therefore different from the information used to prepare a tax return.

For shares held in a taxable account, Form 1099-DIV is a central reporting document. The IRS instructions for Form 1099-DIV identify the relevant boxes and distinguish amounts that are included within other totals. The following discussion focuses on individual U.S. taxpayers. Corporations, foreign investors, trusts, and tax-exempt investors can face additional rules that this introduction does not attempt to resolve.

Ordinary dividends and qualified dividends are different categories

Box 1a reports total ordinary dividends. For an individual, the portion that is not eligible for qualified-dividend treatment generally enters the ordinary income tax calculation. A REIT's regular distribution is not automatically a qualified dividend simply because the shares trade on an exchange or have been held for a long time. The issuer's tax classification and the investor's own requirements both matter.

Box 1b identifies qualified dividends included in box 1a. These may receive the lower capital gain rates when the applicable requirements are satisfied. The IRS instructions generally exclude REIT dividends from qualified-dividend treatment except to the extent permitted under section 857(c). A REIT can therefore report a qualified portion, but treating its entire payment as qualified without checking the tax reporting would be incorrect. IRS Topic 404 explains the distinction between ordinary and qualified dividends.

These boxes are not separate cash receipts to add together. Box 1b is part of box 1a, and section 199A dividends in box 5 are also included in box 1a. The separate boxes communicate potential tax treatment. They do not increase the amount distributed. This distinction becomes particularly important when comparing a brokerage statement's cash total with the income categories on the annual information return.

Capital gain distributions and the Form 1099-DIV capital gain boxes

Box 2a reports total capital gain distributions. IRS Publication 550 explains that REIT capital gain distributions are treated as long-term capital gains regardless of how long the shareholder has owned the shares. A capital gain distribution from the REIT is distinct from a gain or loss the investor realizes by selling REIT shares. Both can affect a return, but they arise from different transactions.

Box 2b identifies unrecaptured section 1250 gain included within box 2a, associated with certain depreciable real property. It is not another distribution to add to the total. IRS Topic 409 describes the general 0%, 15%, and 20% net capital gain rates and the maximum 25% rate for unrecaptured section 1250 gain. The applicable calculation depends on income and the type of gain, so one capital gain rate cannot describe every REIT payment.

A REIT can also retain certain capital gains and report a shareholder's allocated amounts on Form 2439. Publication 550 explains the related reporting, credit, and basis treatment. This is a reason to distinguish a general guide to Form 1099-DIV from a complete list of every document a REIT investor might receive. The actual issuer and brokerage reporting determines which additional instructions are relevant.

Return of capital reduces the shareholder's tax basis

Box 3 reports nondividend distributions, often called return of capital. Under IRS Publication 550, a nondividend distribution generally reduces the adjusted basis of the shares instead of being immediately taxed as dividend income. Basis is the tax amount used to calculate a later gain or loss. A reduction in basis can therefore affect the tax result when those shares are sold.

Once basis has been reduced to zero, an additional nondividend distribution is generally capital gain. Whether that gain is short-term or long-term depends on the holding period. Return of capital is consequently not a promise of permanently tax-free income. It also does not, by itself, establish whether a REIT's distribution is economically sustainable. Tax classification, operating cash flow, and the investment's market value answer different questions.

Section 199A and the qualified REIT dividend deduction

Section 199A includes a deduction component for qualified REIT dividends. The IRS qualified business income deduction overview describes a deduction of up to 20% of qualified REIT dividends, subject to applicable requirements and limits. This is a deduction in calculating taxable income, not a tax credit and not a reduction of the dividend's reported cash amount. Eligible taxpayers may claim it whether they itemize deductions or use the standard deduction.

The IRS states that the qualified business income deduction was made permanent in its update to the 2026 Form 1040-ES (NR). That published statement supplies the current status of the provision. It does not mean every investor receives the same deduction, and it does not make REIT dividends tax-free. The amount depends on the taxpayer's eligible dividends and the applicable return calculation, including taxable-income limitations.

Qualified REIT dividends for this purpose generally exclude capital gain dividends and qualified dividends. The phrase is different from the qualified dividends reported in box 1b. Box 5 identifies section 199A dividends, including qualifying amounts passed through by regulated investment companies. Those amounts are already included in box 1a. The REIT dividend component is not subject to the W-2 wage or qualified-property basis limitations that can affect the separate business-income component.

Eligibility also depends on the investor's holding period. The IRS Form 1099-DIV instructions describe a requirement to hold the shares for more than 45 days during the 91-day period beginning 45 days before the ex-dividend date. Days when risk of loss is diminished and obligations to make related payments can affect qualification. The tax form's box 5 amount alone does not establish that every investor satisfies these conditions.

There is no single REIT dividend tax rate

The ordinary portion, any eligible qualified portion, and capital gain distributions enter different parts of the federal tax calculation. Return of capital follows basis rules, while a section 199A deduction can affect taxable income without reclassifying an ordinary dividend as a qualified dividend. The taxpayer's income, filing circumstances, and other applicable taxes also matter. These distinctions make a single advertised REIT tax rate incomplete.

The IRS explanations of dividend taxation and capital gains are the starting points for identifying the correct categories. Their year-specific thresholds should be read for the return being prepared. This guide does not use an assumed bracket or calculate an after-tax yield, because neither would describe all shareholders or all components of a REIT's distribution.

REITs held in traditional IRAs

Account type changes when the individual generally recognizes taxable income. The IRS traditional IRA overview states that amounts in a traditional IRA, including earnings and gains, generally are not taxed until distributed. Receiving a REIT dividend inside that account therefore differs from receiving the same dividend in a taxable brokerage account. A payment that remains inside the IRA is not itself a withdrawal by the owner.

Withdrawals are governed by IRA distribution rules. IRS Publication 590-B explains that traditional IRA distributions generally are ordinary income, with a nontaxable portion possible when the owner has basis from nondeductible contributions. The original qualified-dividend or capital gain character of an investment receipt does not simply pass through to the owner's withdrawal. Required distributions and additional taxes on certain early withdrawals are separate account-level considerations.

REITs in Roth IRAs and qualified withdrawals

REIT dividends retained within a Roth IRA generally do not create a current dividend tax bill for the account owner. Under IRS Publication 590-B, qualified Roth IRA distributions are tax-free. Qualification generally requires the five-year period and an applicable condition, such as reaching age 59 1/2. The publication also describes qualifying disability, death, and limited first-home circumstances.

Not every Roth withdrawal is a qualified distribution. Ordering rules distinguish contributions, conversions, and earnings, and nonqualified distributions can have different income-tax and additional-tax consequences. Holding a REIT does not remove these requirements. This discussion describes tax treatment, not a recommendation to choose one account over another or an assurance that a particular custodian makes every REIT available.

Reinvested dividends and records for tax reporting

Reinvesting a taxable dividend into additional shares does not remove the obligation to report the dividend. IRS Publication 550 explains dividend reinvestment and stock basis. The new purchase and the distribution are separate tax events even when a brokerage carries them out together. Records of purchases, reinvestments, sales, and nondividend distributions help explain how the adjusted basis of a holding changes over time.

The tax reporting year may also differ from the date cash appears in an account. Publication 550 describes a special rule for certain REIT dividends declared late in the year and paid in January. Taxable dividends can remain reportable even if no information form is received. If Form 1099-DIV does not separate the categories correctly, IRS Topic 404 directs recipients to contact the payer for clarification.

State taxes require a separate review

A federal classification does not settle the state tax treatment of a REIT distribution or an IRA withdrawal. The relevant state's current instructions determine its income reporting, deductions, and filing requirements. This guide does not assume that a federal section 199A deduction produces the same state result. The IRS state government directory provides links to state resources for questions that federal forms cannot answer.

How the dividends paid deduction works at the REIT level

Shopping mall exterior with large windows and palm trees — A property-owning REIT's tax calculation is separate from its shareholders' reporting.

Shareholder taxation is separate from the entity's calculation. 26 U.S.C. 857 allows a qualifying REIT a dividends paid deduction in determining its REIT taxable income. Its distribution requirement generally uses 90% of REIT taxable income calculated before that deduction and excluding net capital gain, with additional statutory adjustments for foreclosure-property income and excess noncash income. It is not a requirement to distribute 90% of revenue or market value.

The deduction helps explain why distributing income has an important role in the REIT structure. It does not mean a REIT is exempt from every tax. Undistributed taxable income and certain other activities can produce entity-level tax under section 857. Nor does the entity's deduction eliminate the shareholder's separate reporting obligations. For the business context, see the overview of REITs; ongoing sector and company coverage is available in Income Builder.

Related Guides

How to Invest in REITs: Account types, individual REITs versus funds, and the metrics investors review.
REIT ETFs: How index REIT ETFs work, with a dated table of major US REIT funds.
Overview of REITs: What REITs are, how they earn and distribute income, and the main REIT types.

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Frequently Asked Questions

How are REIT dividends taxed in a taxable account?

The tax treatment depends on the distribution's components. Ordinary dividends generally enter the ordinary income calculation, qualifying portions may receive qualified-dividend treatment, and capital gain distributions follow capital gain rules. Nondividend distributions generally reduce basis first. Form 1099-DIV identifies these categories, and eligible section 199A dividends may support a deduction.

What is the REIT dividend tax rate?

There is no single rate for every REIT distribution. IRS rules distinguish ordinary dividends, qualified dividends, capital gain distributions, and return of capital. The investor's taxable income and other circumstances determine the applicable calculation. A possible section 199A deduction affects taxable income; it does not turn every REIT dividend into a qualified dividend.

How are REITs in a Roth IRA taxed?

REIT dividends retained in a Roth IRA generally do not create current dividend income tax for the owner. Qualified Roth IRA withdrawals are tax-free under the IRA rules. Nonqualified withdrawals can have different consequences, so the presence of a REIT in the account does not make every withdrawal tax-free.

Do REIT dividends still qualify for a section 199A deduction?

The IRS states that the qualified business income deduction was made permanent. Eligible taxpayers may deduct up to 20% of qualified REIT dividends, subject to applicable requirements and limits. The section 199A category excludes capital gain dividends and qualified dividends, and the investor must satisfy the relevant holding-period and other conditions.

Is a REIT return of capital permanently tax-free?

A nondividend distribution generally reduces the shares' adjusted basis rather than creating immediate dividend income. Once basis reaches zero, additional amounts generally become capital gain. The basis reduction can also increase a later gain on sale, so return of capital is not a guarantee of permanently tax-free income.

Are reinvested REIT dividends taxable?

In a taxable account, reinvesting a taxable dividend does not remove the income-reporting requirement. The dividend and the purchase of additional shares remain separate tax events. Dividends retained inside an IRA instead fall within the account's tax framework, with withdrawals governed by traditional or Roth IRA distribution rules.

Should boxes 1a, 1b, and 5 on Form 1099-DIV be added together?

No. Box 1a is total ordinary dividends and already includes the amounts reported in box 1b and box 5. Box 1b identifies qualified dividends, while box 5 identifies section 199A dividends. Adding the three boxes would count some of the same income more than once.