Are REITs taxed as qualified dividends? (2024)

Are REITs taxed as qualified dividends?

REIT dividends are not qualified because the IRS considers them as pass-through income. These are profits that get distributed to investors without the entity paying taxes first. REIT dividends pass to investors as ordinary income. The IRS taxes the dividends according to the individual investor's income tax rate.

How do I report REIT dividends on my taxes?

Qualified REIT dividends from a fund are reported in Box 5, Section 199A dividends, of your Form 1099‑DIV.

How do REITs avoid double taxation?

Unlike many companies however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.

Are REITs subject to pass-through tax treatment?

In exchange for meeting certain requirements -- in particular, paying at least 90% of their taxable income to shareholders as dividends -- REITs pay no corporate tax whatsoever. Instead, REITs are treated in the same manner as pass-through business entities like LLCs, partnerships, and S-corporations.

What percentage of its taxable income must a REIT distribute to shareholders to qualify for favorable income tax treatment?

As noted earlier, REITs are required to distribute at least 90 percent of their taxable income to shareholders.

Are REIT dividends taxed as qualified dividends?

REIT dividends are not qualified because the IRS considers them as pass-through income. These are profits that get distributed to investors without the entity paying taxes first. REIT dividends pass to investors as ordinary income. The IRS taxes the dividends according to the individual investor's income tax rate.

Where do I report REIT income on tax return?

Filing requirements

If you are a REIT, file one of the following: California Corporation Franchise or Income Tax Return (Form 100) and check the appropriate REIT box on side 3. California Corporation Franchise or Income Tax Return – Water's-Edge Filers (Form 100W) and check the appropriate REIT box on side 3.

How are REIT dividends taxed differently?

The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.

What is the tax advantage of REIT dividends?

Tax benefits of REITs

Current federal tax provisions allow for a 20% deduction on pass-through income through the end of 2025. Individual REIT shareholders can deduct 20% of the taxable REIT dividend income they receive (but not for dividends that qualify for the capital gains rates).

Why are REITs tax inefficient?

REITs, although they trade as stocks, must distribute almost all their income, and the income is taxable at the non-qualified dividend rate except for a small portion (historically about 15%) which is non-taxable because it compensates for depreciation of the property.

Do REITs have tax advantages?

A portion of the REIT's monthly distribution can be classified as a return of capital, which may be tax deferred by an estimated 60%-90%. The individual tax rate that applies to the ordinary income portion of a REIT's distribution is reduced by 20% as a result of the Tax Cuts and Job Act.

Are REITs subject to double taxation?

Another draw for investors is that REITs are not subject to the double taxation of corporations.

What is the 90 rule for REITs?

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

What are the taxable income distribution requirements for a REIT?

A REIT must distribute at least 90% of taxable income in order to meet REIT testing requirements. It will pay tax on the remaining 10% of that income at a rate of 21%. A REIT is special because it can deduct dividends paid on its federal tax return to the extent it has earnings and profits.

What is the bad income test for REITs?

If less than 75% of the REIT's income for the taxable year is real estate related (known as the 75% gross income test, IRCаза856(c)(3)), it can lose REIT status and cannot elect again to be treated as a REIT for five years (IRCаза856(g)).

Should you hold REITs in a Roth IRA?

Typically, REIT dividends are taxed individually as ordinary income, but you can avoid the tax burden if your investment grows within a Roth IRA. Investment earnings are tax-free in a Roth IRA – including REIT dividends — so you may end up keeping significantly more of your earnings than you would with a REIT alone.

Do any REITs pay qualified dividends?

Generally, dividends from REITs are automatically exempt from being qualified dividends. Whether dividends are qualified depends on the nature of the investment that earned the money being passed along to shareholders.

Should you hold REITs in taxable accounts?

REITs and REIT Funds

Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.

How much of qualified dividends are taxable?

How dividends are taxed depends on your income, filing status and whether the dividend is qualified or nonqualified. Nonqualified dividends are taxed as income at rates up to 37%. Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status.

Are REIT dividends taxed as ordinary income?

Most REIT dividends are taxed at ordinary income tax rates (10%-37% depending on income.) You may also be able to claim 20% qualified business income deduction on REIT dividends. Some REIT dividends may also be subject to capital gains tax.

Which REITs pay the highest dividends?

Does a REIT file a tax return?

Generally, a REIT must file its income tax return by the 15th day of the 4th month after the end of its tax year. A new REIT filing a short-period return must generally file by the 15th day of the 4th month after the short period ends.

Why are REITs taxed as ordinary income?

In most cases, REIT dividends are made up of as many as three different types of income: Ordinary income: Most rental income generated by REITs and passed through to investors is considered ordinary income, just as if it had been earned through an LLC or partnership and passed through to an owner.

What does it mean to be taxed as a REIT?

To qualify as a REIT, the trust must distribute at least 90% of its taxable income to shareholders. In turn, REITs typically don't pay any corporate income taxes because their earnings have been passed along as dividend payments.

What is the 3.8% surtax on investment income?

Overview of the NIIT

The NIIT is equal to 3.8% of the net investment income of individuals, estates, and certain trusts. Net investment income includes interest, dividends, annuities, royalties, certain rents, and certain other passive business income not subject to the corporate tax.