How REIT Dividends Are Taxed Differently Than Stock Dividends

REIT dividends are taxed as ordinary income, not as capital gains

When you own shares in a Real Estate Investment Trust (REIT), the dividends you receive are taxed at your full ordinary income tax rate — the same rate as wages or interest. This is different from stock dividends, which often may have access to for lower capital gains rates. If you are in the 24% tax bracket, a REIT dividend is taxed at 24%. A may have access to stock dividend in the same bracket is taxed at 15%.

This tax treatment applies to most REIT dividends you receive, regardless of whether the REIT paid out cash it collected from rent, or cash it received from selling a property. The IRS treats REIT distributions as ordinary income because REITs are required to pass through their income to shareholders without paying corporate tax themselves.

The one exception is a return of capital — a distribution that gives back some of your original investment rather than paying out earnings. These are rare and are noted separately on your tax forms. A return of capital is not taxed in the year you receive it; instead, it reduces your cost basis (the amount you originally paid), which means you pay tax later when you sell.

Key Takeaways

• REIT dividends are taxed as ordinary income at your full tax rate, not at the lower capital gains rate that applies to many stock dividends.
• The tax rate depends on your income bracket, not on how long you held the REIT or how the REIT earned the money.
• You owe tax on REIT dividends whether you receive them in cash or reinvest them automatically.
• A return of capital, if your REIT issues one, is not taxed immediately but reduces what you owe tax on when you sell.
• Holding REITs in a tax-deferred account like a 401(k) or IRA shields you from this tax burden while you own them.

Why REIT dividends get ordinary income treatment

REITs are structured to avoid paying corporate income tax. In exchange, they must distribute at least 90% of their taxable income to shareholders each year. Because the REIT itself does not pay tax, all of that income flows through to you — and the IRS taxes it at ordinary rates.

This is different from a regular corporation, which pays tax on its profits before paying dividends to shareholders. When a corporation pays a dividend from after-tax profits, the dividend qualifies for preferential capital gains rates (0%, 15%, or 20%, depending on your income). A REIT skips the corporate tax step, so the income retains its ordinary character when it reaches you.

How to report REIT dividends on your tax return

Your REIT will send you a Form 1099-DIV in January showing the dividends you received in the prior year. This form breaks down the distribution into categories: ordinary dividends, capital gain distributions, and return of capital. You report the ordinary dividend amount on line 5b of your Form 1040 (or on Schedule B if you received more than $1,500 in dividends).

If your REIT made a capital gain distribution — money it earned by selling a property at a profit — that amount goes on Schedule D as a long-term capital gain, taxed at the preferential capital gains rate. This is separate from the ordinary dividend portion and is taxed more favorably. However, most REIT distributions are ordinary income, not capital gains.

Keep your 1099-DIV forms for your records. If you reinvest dividends automatically through a dividend reinvestment plan (DRIP), you still owe tax on the full amount reinvested, even though you did not receive cash.

The tax cost of holding REITs in taxable accounts

Because REIT dividends are taxed at ordinary rates, holding REITs in a regular brokerage account can be expensive from a tax perspective. If you earn $100 in REIT dividends and you are in the 32% tax bracket, you owe $32 in federal tax. The same $100 in may have access to stock dividends would cost you only $20 in tax.

This tax drag compounds over time. If you reinvest your dividends, you are paying tax each year on money you are not actually taking out. Over decades, this can meaningfully reduce your after-tax returns compared to holding stocks or bonds in the same account.

For this reason, many investors hold REITs in tax-deferred accounts — 401(k)s, traditional IRAs, or Roth IRAs — where the tax burden is eliminated or deferred. This strategy lets you capture the income and diversification benefits of REITs without the annual tax hit.

State and local taxes on REIT dividends

In addition to federal tax, you may owe state income tax on REIT dividends. Most states tax ordinary dividends at the same rate as wages. A few states — including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not tax income at all, so residents of those states owe only federal tax on REIT dividends.

Some states offer preferential rates for capital gains but not for ordinary dividends. If you live in a state with an income tax and hold REITs in a taxable account, factor in your state rate when calculating the true tax cost of REIT ownership.

Selling REIT shares and capital gains tax

When you sell REIT shares, you owe capital gains tax on the profit (the difference between what you paid and what you sold it for). This is separate from the dividend tax and is taxed at capital gains rates — 0%, 15%, or 20% for federal tax, depending on your income and how long you held the shares.

If you held the REIT for more than one year, the gain is long-term and gets the preferential rate. If you held it for one year or less, the gain is short-term and is taxed as ordinary income. Your cost basis — the amount you originally paid — may be reduced by any return of capital distributions you received, which increases your taxable gain when you sell.

Frequently Asked Questions

Do I owe tax on REIT dividends if I reinvest them?

Yes. Whether you receive dividends in cash or reinvest them through a DRIP, you owe tax on the full amount in the year you receive them. The IRS does not care whether the money stayed in the REIT or came to your account.

What is a return of capital, and how is it taxed?

A return of capital is a distribution that gives back part of your original investment rather than paying out earnings. It is not taxed in the year you receive it. Instead, it reduces your cost basis, which means you will pay tax on a larger gain when you eventually sell the REIT.

Are REIT dividends taxed differently if I hold them in a 401(k)?

No tax is owed on REIT dividends while they remain in a traditional 401(k) or IRA. You pay tax only when you withdraw the money. In a Roth IRA, REIT dividends grow tax-free and are never taxed if you follow withdrawal rules.

Can I deduct REIT losses?

If you sell REIT shares at a loss, you can deduct the loss against capital gains from other investments. If your losses exceed your gains, you can deduct up to $3,000 of the excess against ordinary income in that year, with any remaining loss carried forward to future years.

Why are REIT dividends taxed as ordinary income instead of capital gains?

REITs are structured to avoid paying corporate tax themselves. Because the REIT does not pay tax on its income, that income retains its ordinary character when it flows through to shareholders. A regular corporation pays tax first, which is why its dividends may have access to for lower capital gains rates.