FAQs
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.
Do you pay tax on REIT income? ›
Real Estate Investment Trusts (REITs) have become an interesting option for income investors due to their income payouts and capital appreciation potential. Distributions from REITs can provide income flow, but the income is considered taxable in the eyes of the IRS.
How do I avoid taxes on REIT? ›
Unlike partnerships which are flow-through entities for tax purposes, REITs generally avoid entity-level tax by virtue of receiving a dividends paid deduction and by effectively being required to distribute all of their earnings and profits each year.
What is the tax strategy of a REIT? ›
Tax Treatment of REITs
REITs are exempt from corporate income taxes as long as they distribute most of their income to shareholders. Investors receive dividends that are taxed at their individual tax rates, potentially benefiting from lower tax rates on qualified dividends.
What is the 90% rule for REITs? ›
Even with a challenging market, REITs are considered a staple for many investment portfolios thanks to the 90% rule. As the name implies, this rule stipulates that real estate trusts must distribute 90% of their taxable earnings to existing shareholders.
What are the pros and cons of REITs? ›
Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.
What happens when a REIT sells a property? ›
First, a capital gains qualifying event occurs if the REIT sells property that it has owned and managed. If that property is sold for a profit, the gain will be subject to capital gains taxes. Any distribution of this profit to investors will either be considered short-term or long-term capital appreciation.
Is it bad to hold REITs in a taxable account? ›
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.
What is the 5 50 rule for REITs? ›
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).
Are REITs tax free in 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.
Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors. Consider consulting your tax adviser before investing in REITs. The Office of Investor Education and Advocacy has provided this information as a service to investors.
What is one of the disadvantages of investing in a private REIT? ›
Cons of Investing in a Private REIT
Additionally, they may lack the liquidity of publicly traded REITs, making it more challenging to sell your investment if needed. Moreover, private REITs are generally riskier investments compared to their publicly traded counterparts.
Do REITs have to pay dividends? ›
REIT shares trade on the open market, so they are easy to buy and sell. The common denominator among all REITs is that they pay dividends consisting of rental income and capital gains. To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends.
How much of my retirement should be in REITs? ›
“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.
Are REITs double taxed? ›
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.
What is bad income for REITs? ›
For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.
Are REITs good for passive income? ›
Since REITs are required by the IRS to pay out 90% of their taxable income to shareholders, REIT dividends are often much higher than the average stock on the S&P 500. One of the best ways to receive passive income from REITs is through the compounding of these high-yield dividends.
Are dividends taxed as ordinary income? ›
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.
