How REIT Dividends and Sales Are Taxed

REIT dividends are taxed as ordinary income, not capital gains

When you own shares in a REIT, the dividends it pays you are taxed at your ordinary income tax rate — the same rate as salary or interest. This is the key difference between REITs and stocks. If you own a regular stock that pays dividends, those dividends may may have access to for a lower "may have access to dividend" rate. REIT dividends almost never do.

Your REIT will send you a Form 1099-DIV each January showing how much you received in dividends during the previous year. You report this amount on your tax return and pay tax on it at whatever your top tax bracket is. If you are in the 24% federal bracket, you pay 24% tax on REIT dividends. If you are in the 32% bracket, you pay 32%.

This is why REIT dividends feel expensive to own in a regular taxable account. You are paying full income tax on the payout every single year, even if you reinvest the money and do not spend it.

Key Takeaways

• REIT dividends are taxed as ordinary income at your full tax rate, not at the lower capital gains rate that may have access to stock dividends receive.
• When you sell REIT shares for a profit, that profit is taxed as a capital gain — short-term if you held the shares less than a year, long-term if you held them longer.
• Holding REITs in a retirement account like a 401(k) or IRA shields you from annual dividend taxes until you withdraw the money.
• Some REIT dividends are classified as return of capital, which reduces your cost basis rather than creating immediate tax, though you still owe tax when you sell.

Capital gains tax when you sell REIT shares

When you sell REIT shares, you owe tax on the profit — the difference between what you paid and what you sold them for. The rate depends on how long you held the shares. If you held them for one year or less, the gain is short-term capital gain, taxed at your ordinary income rate. If you held them for more than one year, it is a long-term capital gain, taxed at a lower rate (0%, 15%, or 20% depending on your income).

This works the same way as selling any stock. The REIT itself does not pay tax on the gain — you do, when you sell your shares. If you sell at a loss, you can deduct up to $3,000 of capital losses against your ordinary income in a single year, and carry forward any remaining losses to future years.

Why REITs in retirement accounts make sense

Because REIT dividends are taxed as ordinary income every year, many investors hold REITs inside tax-deferred accounts like 401(k)s, traditional IRAs, or Roth IRAs. Inside these accounts, you do not pay tax on the dividends when you receive them. You only pay tax when you withdraw money from the account (or never, in the case of a Roth).

This is one of the main reasons financial advisors often suggest putting REITs in retirement accounts and putting stocks with lower dividend yields or capital gains in taxable accounts. It is a way to manage which investments sit in which tax environment.

If you have a choice between holding a REIT or a stock in a taxable account, and you have room in a 401(k) or IRA, the REIT usually belongs in the retirement account.

Return of capital distributions and cost basis

Some REIT dividends are classified as return of capital rather than ordinary income. This happens when the REIT pays out more cash than it earned in that year. The Form 1099-DIV will break down which portion of your dividend is ordinary income and which is return of capital.

Return of capital is not taxed in the year you receive it. Instead, it reduces your cost basis — the amount you originally paid for the shares. If you bought 100 shares at $50 each, your cost basis is $5,000. A $500 return of capital distribution reduces that to $4,500. You will owe tax on that $500 eventually, but only when you sell the shares and calculate your capital gain.

This can be confusing because you receive cash but do not owe tax on it immediately. Keep the Form 1099-DIV and track your cost basis carefully, because you will need it when you sell.

State and local taxes on REIT income

In addition to federal tax, most states tax REIT dividends as ordinary income. A few states do not have income tax at all (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming). Most others tax REIT dividends at the same rate they tax wages.

Some cities also tax income. New York City, for example, taxes residents on REIT dividends. If you live in a state or city with income tax, add that to your federal rate when calculating what you will owe on REIT dividends.

Tax-loss harvesting with REITs

If a REIT you own drops in value, you can sell it at a loss and use that loss to offset capital gains from other investments or up to $3,000 of ordinary income. This is called tax-loss harvesting. The loss reduces your tax bill in the current year and carries forward to future years if you have more loss than you can use.

One rule to watch: if you sell a REIT at a loss and buy the same REIT (or a substantially identical one) within 30 days before or after the sale, the IRS disallows the loss under the wash-sale rule. You can harvest the loss by selling one REIT and buying a different real estate fund, but not by buying back the same one too quickly.

How to track REIT taxes across multiple accounts

If you own REITs in both a taxable account and a retirement account, keep them separate in your mind. Dividends from the taxable account go on your tax return. Dividends from the retirement account do not — they are invisible to the IRS until you withdraw.

Your brokerage will send you a Form 1099-DIV for each taxable account you hold. If you have REITs at multiple brokers, you will receive multiple 1099s. Add them all together when you file. Your retirement account custodian will not send you a 1099-DIV for REIT dividends inside that account.

When you sell REIT shares, your brokerage reports the sale on Form 8949 (Sales of Capital Assets). This feeds into Schedule D on your tax return. Again, sales inside retirement accounts do not appear on your tax return.

Frequently Asked Questions

Can REIT dividends ever be taxed as capital gains instead of ordinary income?

No. REIT dividends are always taxed as ordinary income at the federal level, with rare exceptions for return of capital portions. This is a structural requirement of being a REIT — the fund must distribute 90% of taxable income to shareholders, and those distributions are taxed as ordinary income to you.

What is the difference between short-term and long-term capital gains on REIT shares?

Short-term gains (shares held one year or less) are taxed at your ordinary income rate. Long-term gains (shares held more than one year) are taxed at 0%, 15%, or 20% depending on your total income. Long-term is almost always better. The holding period starts the day after you buy and ends the day you sell.

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

Yes. Whether you take the dividend as cash or reinvest it in more shares, you owe tax on the full amount in the year you receive it. Reinvestment does not defer the tax — it just means you own more shares to generate future dividends.

What happens to REIT taxes if I inherit shares?

When you inherit REIT shares, your cost basis is stepped up to the market value on the date of death. This means if someone bought shares at $40 and they were worth $60 when they died, your cost basis is $60. You owe no tax on that $20 gain — it disappears. You only owe tax on gains that occur after you inherit.

Should I avoid REITs because of the tax on dividends?

Not necessarily. REITs often pay higher dividends than stocks, and that higher payout may outweigh the tax cost even in a taxable account. The math depends on the specific REIT, your tax bracket, and whether you have room in retirement accounts. If you do have room in a 401(k) or IRA, that is usually the better place for REITs.