What Are Qualified REIT Dividends?

Key Takeaways

• Most REIT dividends are taxed as ordinary income, but some qualify for the 20% QBI deduction under Section 199A.
• Qualified REIT dividends can lower your effective tax rate, with the top rate dropping from 37% to 29.6%.
• You don’t need to own a business to claim the QBI deduction on REIT dividends, but you must meet the IRS holding period and income rules.
• REITs issue a 1099-DIV that breaks down how your dividends are taxed—ordinary income, capital gains, or return of capital.
• 1031 Crowdfunding gives investors access to REITs that may offer passive income and greater tax efficiency through smart diversification.

REITs are often used to generate income in a portfolio—but how that income is taxed can surprise even seasoned investors. Unlike qualified stock dividends, most REIT dividends are taxed as ordinary income. However, certain REIT distributions may be eligible for valuable tax breaks, including the 20% qualified business income (QBI) deduction under Section 199A.

In this article, we’ll break down the types of REIT dividends, how they’re taxed, and what investors need to know to take full advantage of these income-producing assets while minimizing tax liability.

What Are REIT Dividends?

Real Estate Investment Trusts (REITs) are companies that operate or finance income-producing real estate. REITs pool capital from investors to acquire and manage property portfolios, allowing individuals to earn a share of the income—typically through dividends—without having to directly buy or manage the real estate themselves.

Because of its REIT status, the entity is not treated as a regular corporation for tax purposes. To qualify, the IRS requires REITs to meet several conditions. For example, they must distribute at least 90% of their taxable income to shareholders as dividends, and the majority of their assets must be invested in real estate-related holdings.

REIT dividends typically fall into three categories:

• Ordinary income dividends – The most common type, generally taxed at your ordinary income tax rate.
• Capital gain distributions – Taxed as either short-term or long-term capital gains, depending on the holding period of the underlying assets sold by the REIT.
• Return of capital (ROC) – A portion of the payout that represents a return of your original investment, not taxable when received but reduces your cost basis.

Note: Most REIT dividends are not considered “qualified dividends” and are therefore taxed at ordinary income tax rates, not the lower long-term capital gains rates. However, they may be eligible for special treatment under the Qualified Business Income (QBI) deduction, which can reduce your effective tax rate by up to 20%.

What Are Qualified REIT Dividends?

Dividends are a distribution of corporate earnings given to a company’s shareholders. You might receive dividends if you own stocks in a company or a mutual fund that includes stock that pays dividends.

Qualified REIT dividends are REIT distributions that meet the criteria under Section 199A for the QBI deduction. These dividends are taxed as ordinary income but may qualify for a 20% deduction, reducing the effective tax burden. Unlike qualified stock dividends, they do not require a holding period or originate from a corporation; instead, they are defined by the IRS specifically for QBI purposes.

The United States Internal Revenue Service (IRS) states that qualified dividends must:

• Meet the required holding period: You must hold the dividend for a certain period before the IRS considers it qualified. You must hold the dividend for over 60 days in a 121-day time frame. This timeframe should also occur at least 60 days before the ex-dividend date, which is set one day before the record date.
• Be paid for by a qualified company: A qualified United States or foreign corporation must pay for the dividend.

The major benefit of qualified dividends is the lower tax rate. Exact tax rates vary by income bracket, but they are lower than typical income tax rates. Certain income thresholds might be taxed at 0%. These dividends are taxed at ordinary income rates after applying the 20% deduction.

How Are Qualified REIT Dividends Taxed?

Qualified REIT dividends are taxed at ordinary income rates but may qualify for a 20% deduction under the QBI deduction. This deduction means you only pay tax on 80% of your qualified REIT dividend income. To see the potential savings, let’s look at an example using the top marginal ordinary income tax rate of 37%: Here’s a simple example:

The good news is that this deduction is available to both itemizers and non-itemizers. However, there are phase-outs and limits for high-income individuals, but REIT dividends are often exempt from service business limitations.

For 2024, if your taxable income exceeds $383,900 (married filing jointly) or $191,950 (all others), your QBI deduction may be limited.

What Are Other Types of REIT Distributions?

There are other types of REIT distributions, including capital gain distributions and return of capital.

• Capital gain distributions: Taxed at long-term capital gains rate (0%, 15%, or 20%).
• Return of capital: Not taxed immediately; reduces your cost basis.

Each year, REITs issue a Form 1099-DIV, which breaks down the sources of dividends. We discuss filling out your 1099-DIV below.

How to Report Qualified REIT Dividends on Taxes

Investors need to follow proper tax reporting and filing rules for REIT dividends. Investors report dividends on Schedule B (Form 1040) and use Form 8995 or 8995-A to claim the QBI deduction.

If investing through a fund or broker, you should receive a 1099-DIV form each year if you own shares in a REIT. This document lists your total amount received from dividends, along with their type. You can use this information and the provided instructions to report the dividends to the IRS.

Your 1099-DIV contains crucial data, located in the following boxes:

• Box 1: This box lists the dividends that are considered ordinary income.
• Box 1b: This box lists any qualified dividends.
• Box 2a: This box lists capital gains dividends.
• Box 3: This box lists any return of capital investments.

These crucial details provide the necessary information to file taxes correctly. You must pay regular income tax on dividends considered as ordinary income. However, capital gains and return of capital dividends have different requirements.

Capital gain tax rates can be either short- or long-term, depending on how long you owned the investment. Return of capital investments is usually not taxed because they qualify as your own money.

The 1099-DIV also provides detailed instructions for proper filing techniques. It is helpful to work with a financial advisor or tax professional when determining how to report REIT dividends on your tax return.

Making the Most of Qualified REIT Dividends

REIT dividends can be tax-efficient if they qualify for the 20% QBI deduction. It’s important for investors to review how REIT dividends are classified on their tax forms.

1031 Crowdfunding provides access to REITs and DSTs that help investors:

• Earn passive income.
• Defer taxes via 1031 exchanges (for DSTs).
• Potentially qualify for income tax deductions (for REIT dividends).

Want to earn passive income from real estate with smart tax strategies? Register for an investor account on our platform today.

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