Taxes & REIT Investment (2024)

FAQs

How much of REIT income is taxed? ›

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.

When an investor sells REIT shares, any appreciation is also subject to capital gains taxes. Holding REITs in tax-advantaged accounts like individual retirement accounts can defer or eliminate taxes on distributions, potentially making them more tax-efficient for some investors.

Real estate investment trusts (REITs)

While the income generated from REITs is great for investors, it's even better when the security is held in a tax-advantaged account because you won't owe taxes on the income, though eventually you will be subject to taxes on withdrawals from traditional IRAs and 401(k)s.

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).

How to Qualify as a REIT? 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.

General requirements

A REIT cannot be closely held. A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).

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

The potential downsides, or CONS, of a REIT investment include the fact that they are taxed as income, the variation in the fee structures of different managers, and market volatility due to interest rate movements or trends in the real estate market.

These trusts primarily pay through dividends and generally don't appreciate in value significantly. 1 Because of their high dividend yield, holding a REIT in your Roth IRA or health savings account is generally the most tax-efficient strategy.

How often do REITs pay dividends? ›

REITs and stocks can both pay dividends, usually on a monthly, quarterly, or yearly basis. Some investments will also offer special dividends, but they're unpredictable.

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.

Investing in REITs through your IRA provides many advantages, such as: Diversification: REIT investments through IRAs allow you to get exposure to the real estate market without investing directly in property. This strategy can help investors reduce their overall risk.

How Do REITs Qualify for Favorable Tax Treatment? A DPP is an investment company that passes through both income and losses to investors. Think hedge funds, that are generally structured as pass-through entities, passing through both income and losses. REITs only pass-through income.

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

For each tax year, the REIT must derive: at least 75 percent of its gross income from real property-related sources; and. at least 95 percent of its gross income from real property-related sources, dividends, interest, securities, and certain mineral royalty income.

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

They're paid out of the earnings and profits of the corporation. Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.

REITs generate passive income primarily through leasing space and collecting rent on their properties.