How REIT Dividends Are Taxed Differently From Stock Dividends

REIT dividends are taxed as ordinary income, not as may have access to dividends

When you receive a dividend from a REIT, the IRS treats it differently than a dividend from a regular stock. Most REIT dividends are taxed at your ordinary income tax rate — the same rate as your salary or wages — rather than at the lower may have access to dividend rate. This is the single biggest tax difference between REITs and stocks, and it can meaningfully affect what you keep after taxes.

The reason is structural. REITs must distribute at least 90 percent of their taxable income to shareholders each year. Because of this requirement and the way REIT income is generated (from rents, interest, and property sales rather than corporate profits), the IRS does not classify most REIT dividends as may have access to. A may have access to dividend — which gets the lower long-term capital gains tax rate — comes from corporate profits and meets specific holding-period rules. REIT dividends do not fit that definition.

This matters most if you are in a higher tax bracket. If you are in the 24 percent federal tax bracket, a may have access to dividend is taxed at 15 percent, but a REIT dividend is taxed at 24 percent. Over time, that difference compounds.

Key Takeaways

• REIT dividends are taxed as ordinary income at your full marginal tax rate, not at the lower may have access to dividend rate of 15 or 20 percent.
• This tax treatment applies to most REIT dividends because REITs are required to distribute 90 percent of taxable income and do not generate the type of corporate profits that may have access to for preferential rates.
• The tax difference between REIT dividends and may have access to stock dividends can be significant — potentially 9 to 20 percentage points depending on your tax bracket.
• Holding a REIT in a tax-deferred account like a 401(k) or IRA can eliminate this tax burden, making REITs more tax-efficient in those accounts than in taxable ones.

Why the IRS treats REIT dividends as ordinary income

The tax code distinguishes between two types of income: ordinary income and capital gains. may have access to dividends — those paid by corporations from their profits — receive preferential tax treatment because they represent earnings that were already taxed at the corporate level. REIT dividends do not get this treatment because they come from a different source.

A REIT generates income primarily from rent collected on properties it owns and interest earned on mortgages it holds. When a REIT distributes this income to you, it is passing through income that has not been taxed at a corporate level — REITs themselves pay no federal income tax. The IRS therefore taxes your share of that income at your ordinary rate. Additionally, some REIT distributions may include return of capital or capital gains, each with its own tax treatment, but the bulk of what you receive is ordinary income.

This is why your REIT will send you a Form 1099-DIV each January showing how much of your distribution is ordinary income, how much (if any) is capital gain, and how much (if any) is return of capital. You report each portion separately on your tax return.

How your tax bracket affects the real cost of REIT dividends

The tax impact of REIT dividends depends entirely on your federal tax bracket. If you are in the 12 percent bracket, ordinary income and may have access to dividends are taxed at 15 percent and 0 percent respectively — a difference of 15 percentage points. If you are in the 35 percent bracket, the difference is 20 percentage points (35 percent ordinary versus 15 percent may have access to).

Consider a concrete example: you receive $1,000 in REIT dividends and $1,000 in may have access to stock dividends, and you are in the 24 percent tax bracket. The REIT dividend costs you $240 in federal tax. The may have access to dividend costs you $150. That $90 difference on $1,000 of income adds up quickly if you hold a large REIT position or reinvest dividends over many years.

State and local taxes can add another layer. Some states tax dividend income at your full marginal rate regardless of type, while others offer preferential rates for may have access to dividends. Check your state's rules to understand the full picture.

When REIT dividends might be taxed as capital gains instead

Not all REIT distributions are ordinary income. Your Form 1099-DIV will break down your distribution into three categories: ordinary income, capital gain distributions, and return of capital.

Capital gain distributions occur when a REIT sells a property at a profit. These are taxed at your long-term capital gains rate (0, 15, or 20 percent depending on your bracket), not your ordinary rate. This is the same preferential treatment as may have access to dividends. However, capital gain distributions are typically a smaller portion of your total REIT distribution — most of what you receive is ordinary income from rents and interest.

Return of capital is a distribution of your own money back to you — it reduces your cost basis in the REIT rather than being taxed immediately. You will owe tax on this amount only when you sell the REIT and realize a gain. Return of capital is relatively uncommon but can occur in years when a REIT distributes more than it earned.

How holding a REIT in a retirement account changes the tax picture

The ordinary income tax treatment of REIT dividends is one reason financial advisors often recommend holding REITs inside tax-deferred accounts like a 401(k), traditional IRA, or Roth IRA rather than in a taxable brokerage account.

Inside a traditional 401(k) or IRA, REIT dividends accumulate tax-free. You pay tax only when you withdraw the money in retirement, and then at your ordinary income rate at that time. Inside a Roth IRA, REIT dividends accumulate completely tax-free, and may have access to withdrawals are never taxed. Either way, you avoid the annual tax bill on the dividends themselves.

In a taxable account, you owe federal (and often state) tax on REIT dividends every year, even if you reinvest them. This drag on returns is one reason some investors prefer to hold stocks with lower dividend yields or growth stocks (which defer gains until sale) in taxable accounts and reserve REITs for retirement accounts.

Comparing the tax cost of REITs to stocks and bonds

REITs are less tax-efficient than stocks in a taxable account but more tax-efficient than bonds. Here is why:

Stocks: may have access to dividends are taxed at 0, 15, or 20 percent. Long-term capital gains (from selling after holding one year) are also taxed at these preferential rates. You can also defer gains indefinitely by not selling.

REITs: Dividends are taxed as ordinary income (12 to 37 percent). Capital gains distributions are taxed at preferential rates, but these are usually a small portion of distributions. You cannot defer the tax on ordinary income distributions.

Bonds: Interest income is taxed as ordinary income at your full marginal rate, just like REIT dividends. Bonds offer no preferential tax treatment.

This comparison suggests that if you are choosing between a REIT and a stock in a taxable account, the tax difference is worth considering — especially if the stock pays may have access to dividends. However, if you are choosing between a REIT and a bond, there is no tax advantage to either.

Strategies to reduce the tax impact of REIT holdings

If you want to own REITs but minimize the tax drag, you have several options. The simplest is to hold them in a retirement account, where the tax treatment of dividends does not matter. This works if you have room in a 401(k), IRA, or other tax-deferred account.

If you must hold REITs in a taxable account, consider holding them in a lower-income year or in an account belonging to a spouse or dependent in a lower tax bracket (if applicable). You can also harvest tax losses on REIT positions to offset gains elsewhere in your portfolio, though you must wait 30 days before repurchasing the same REIT to avoid the wash-sale rule.

Another approach is to accept the tax cost as part of the REIT's total return. If a REIT offers a 5 percent dividend yield and you are in the 24 percent bracket, your after-tax yield is roughly 3.8 percent. If that still meets your return target, the tax treatment is a secondary concern.

Frequently Asked Questions

Can REIT dividends ever be taxed as may have access to dividends?

No. The IRS does not classify REIT dividends as may have access to dividends under any circumstances. They are always taxed as ordinary income, with the exception of capital gain distributions (which are taxed at capital gains rates) and return of capital (which is not immediately taxed). This is a structural feature of how REITs are taxed, not something that changes based on how long you hold the REIT.

Is the tax on REIT dividends the same in every state?

No. Federal tax treatment is uniform, but state and local taxes vary. Some states tax all dividend income at your marginal rate. Others offer preferential rates for may have access to dividends but not for REIT dividends. A few states have no income tax at all. Check your state's tax code or speak with a tax professional to understand your state's rules.

Why would I own a REIT in a taxable account if the dividends are taxed so heavily?

REITs can still make sense in a taxable account if you need current income, if you do not have room in retirement accounts, or if the REIT's total return (dividend plus price appreciation) justifies the tax cost. Additionally, some investors prioritize diversification and real estate exposure over tax efficiency. The tax treatment is one factor among many.

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

Yes. Reinvesting dividends does not defer the tax. You owe federal and state income tax on REIT dividends in the year you receive them, whether you take the cash or reinvest it. This is different from capital gains, where you can defer tax by not selling.

What is return of capital on a REIT distribution?

Return of capital is a distribution of your own investment back to you. It reduces your cost basis (the amount you paid for the REIT) rather than being taxed immediately. You will owe tax on this amount only when you sell the REIT and realize a gain. Return of capital is shown separately on your Form 1099-DIV and is less common than ordinary income or capital gain distributions.