Real Estate Tax Calc
The three types of REIT distributions and how each is taxed
A REIT (real estate investment trust) is required by law to distribute at least 90% of its taxable income to shareholders. Those distributions are not all created equal from a tax standpoint. They are reported on Form 1099-DIV and divided into three main categories, each with a different tax treatment.
Ordinary dividends (Box 1a) represent the REIT's net rental and operating income passed through to shareholders. For most investors, these are taxed at ordinary income rates — potentially 22%, 24%, 32%, 35%, or 37% depending on your bracket. Unlike qualified dividends from C-corporations, REIT ordinary dividends generally do not meet the requirements for the reduced 0/15/20% qualified dividend rate, because REITs are not C-corporations paying dividends from already-taxed corporate earnings. Capital gain distributions (Box 2a) result from the REIT selling appreciated properties. These are taxed at long-term capital gain rates. Any unrecaptured Section 1250 gain (Box 2b) within the capital gain distribution is taxed at up to 25%. Return of capital (Box 3) is not immediately taxable but reduces your cost basis.
The Section 199A deduction: a 20% discount on REIT dividends
The most important tax feature of REIT investing for individual investors is the Section 199A deduction. Under tax law made permanent in 2026, individual taxpayers can deduct 20% of their qualified business income — and REIT ordinary dividends qualify as pass-through income eligible for this deduction. For a taxpayer in the 22% bracket receiving $10,000 of REIT ordinary dividends, the 199A deduction of $2,000 (20% of $10,000) effectively reduces the tax on those dividends from $2,200 to about $1,760 — an effective rate of 17.6% instead of 22%.
The 199A deduction on REIT dividends is reported on Form 1040 as a deduction from income, and the qualifying REIT dividend amount is found in Box 5 of your Form 1099-DIV (labeled 'Section 199A dividends'). Unlike the 199A deduction for business owners, the REIT investor version has no W-2 wage limitation or basis requirement — every investor below the income phase-in range can take it in full. The deduction phases in between $197,300 and $247,300 of taxable income (single, 2025) and $394,600 and $494,600 (MFJ). Above the upper threshold, more complex rules apply, but most retail REIT investors are below these thresholds and take the full deduction.
Return of capital: how it works and why basis tracking matters
Return of capital (Box 3 of Form 1099-DIV) represents the portion of a REIT distribution that exceeds the REIT's taxable income — essentially a return of your original investment. It is not immediately taxable, but it is not free money either: each dollar of return-of-capital distribution reduces your cost basis in the REIT shares. When you eventually sell, a lower basis means a larger capital gain.
Example: you buy 100 shares of a REIT at $20/share ($2,000 basis). Over three years, you receive $0.50/share of return-of-capital distributions ($150 total). Your adjusted basis falls to $1,850. When you sell for $2,200, your taxable gain is $350 ($2,200 − $1,850) rather than $200. The return-of-capital distributions were not free — they were deferred capital gain. Once your adjusted basis reaches zero, any further return-of-capital distributions are immediately taxable as capital gain (long-term if you have held the shares more than one year). Keep a running record of all return-of-capital distributions received to avoid a basis miscalculation at sale. Some brokerages track this automatically in your cost-basis records; others do not. Verify.
Qualified REIT dividends versus qualified stock dividends
Investors sometimes assume that 'qualified dividends' — eligible for the 0/15/20% rate — include REIT dividends. They typically do not. The qualified dividend rate requires dividends to come from a domestic C-corporation or a qualifying foreign corporation, and the shares must have been held for more than 60 days. REITs are not C-corporations; they are pass-through entities that distribute income before paying corporate tax. As a result, most REIT dividends do not qualify for the lower rate.
The exception is a small portion of a REIT distribution that may come from a REIT's taxable REIT subsidiary (a C-corp subsidiary within the REIT structure) or from gains on qualified dividend-paying stocks held by the REIT. This qualified portion, if any, appears separately on your 1099-DIV in Box 1b. For most diversified equity REITs, Box 1b is zero or very small. Mortgage REITs may occasionally have more qualified dividends if they hold corporate securities. Do not confuse the Section 199A deduction (a separate deduction on Form 1040 available to all REIT investors) with qualified dividend treatment — they are different mechanisms with different Form 1040 treatments.
Tax treatment of REIT capital gain distributions
When a REIT sells a property and distributes the gain to shareholders, it appears on your 1099-DIV in Box 2a as a long-term capital gain distribution, regardless of how long you personally held the REIT shares. REIT capital gain distributions are always long-term by statute — even if you bought the shares the week before the distribution. This is more favorable than the treatment of ordinary stock dividends, where you must hold the stock for 61 days around the ex-dividend date to qualify for the lower rate.
Within the capital gain distribution, any unrecaptured Section 1250 gain (Box 2b) is taxed at up to 25% — the depreciation recapture rate. For equity REITs that own real property, a meaningful portion of capital gain distributions often consists of unrecaptured Section 1250 gain, because buildings have been depreciating throughout ownership. An investor in a 22% bracket paying long-term capital gain rates might face the higher 25% rate on the depreciation-recapture component of a REIT capital distribution. Monitor Box 2b on your 1099-DIV and incorporate it into your estimated tax payments if you are receiving large capital distributions from REITs in a given year.
REIT dividends in an IRA versus a taxable account
REITs are often cited as good candidates for tax-deferred accounts (traditional IRA, 401(k)) because the high ordinary income dividends benefit most from the shelter of tax deferral. In a traditional IRA, REIT dividends compound without current taxation; withdrawals in retirement are taxed as ordinary income. In a Roth IRA, all REIT returns — ordinary income, capital gains, and appreciation — accumulate and are distributed tax-free.
The opportunity cost in a taxable account is real: a REIT yielding 5% with all-ordinary-income dividends, held in a 24% bracket, produces 3.8% after federal income tax. The same REIT in a Roth IRA compounds at the full 5%. Over 20 years on a $50,000 investment, the difference between 3.8% and 5% compounding is roughly $35,000 of additional after-tax wealth. However, placing REITs exclusively in tax-deferred accounts means taxable accounts hold other assets, which may produce qualified dividends or capital gains at lower rates. Portfolio-level tax efficiency often requires holding REITs in tax-deferred or tax-exempt accounts and holding growth stocks or qualified dividend payers in taxable accounts. The Section 199A deduction partially offsets the tax drag of REITs in taxable accounts; factor it in before deciding.
Publicly traded versus non-traded and private REITs: tax differences
Publicly traded REITs (listed on NYSE, Nasdaq, or CBOE) are straightforward: 1099-DIVs arrive in February, and your broker tracks cost basis for shares purchased after 2011. Non-traded REITs (offered through broker-dealers, often with 7–10 year lock-ups) and private REITs (available to accredited investors through platforms or advisors) follow the same fundamental tax rules but have additional complexities.
Non-traded REIT distributions often include high return-of-capital components in early years because REIT income may lag the initial capital raised during the offering period. Basis erosion through heavy return-of-capital distributions is more common and more rapid with non-traded REITs. Additionally, non-traded REIT redemption programs may be limited, making basis tracking important long before a formal exit opportunity arises. Private REITs sometimes structure investments as limited partnerships and issue K-1s rather than 1099-DIVs — reverting to the partnership tax treatment described in the crowdfunding guide above. Always confirm whether you will receive a 1099-DIV or K-1 before investing, as the compliance burden and available deductions differ substantially.
How to report REIT income on your tax return
REIT income from a 1099-DIV is reported as follows: ordinary dividends (Box 1a) on Schedule B (Interest and Ordinary Dividends), which flows to Form 1040 Line 3b. Qualified dividends (Box 1b, often zero for REITs) are separately noted on Form 1040 Line 3a. Capital gain distributions (Box 2a) are reported on Schedule D (or directly on Form 1040 if you have no other capital transactions), and the 0/15/20% capital gain rate applies. Unrecaptured Section 1250 gain (Box 2b) is carried to the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions, where the 25% cap rate is applied. Return of capital (Box 3) is not entered on the tax return currently — just reduce your basis records.
The Section 199A deduction is claimed on Form 8995 (or Form 8995-A for higher-income taxpayers). The qualifying REIT dividend amount from Box 5 of your 1099-DIV feeds into this form. The resulting deduction reduces your taxable income on Form 1040, not on Schedule B. Tax software handles this automatically if you enter your 1099-DIV data completely — but verify that the software is correctly identifying Box 5 as qualifying REIT dividends and generating the Form 8995 deduction.
Frequently asked questions
Are REIT dividends taxed as ordinary income?
Most REIT ordinary dividends are taxed at ordinary income rates (not the lower qualified dividend rate), but investors receive a 20% Section 199A deduction on qualifying REIT dividends that effectively reduces the rate.
What is the Section 199A deduction on REIT dividends?
It is a 20% deduction available to individual investors on ordinary REIT dividends, found on Form 8995. For a taxpayer in the 24% bracket, the effective rate on REIT ordinary dividends becomes about 19.2% rather than 24%.
How is return of capital from a REIT taxed?
Return-of-capital distributions (Box 3 on Form 1099-DIV) are not immediately taxable. They reduce your cost basis in the shares. When you sell, the lower basis creates a larger capital gain. Once basis reaches zero, further return-of-capital distributions are taxable as capital gain.
Are REIT dividends better held in an IRA or taxable account?
REITs are generally more tax-efficient in a traditional or Roth IRA because ordinary dividends (which do not benefit from the qualified dividend rate) compound without current taxation. However, the 199A deduction partially reduces the taxable-account drag, so the answer depends on your overall portfolio.
What is the unrecaptured Section 1250 gain on a REIT 1099?
It is the portion of a REIT's capital gain distributions attributable to depreciation previously taken on the underlying real property. It is taxed at up to 25%, higher than the standard 0/15/20% long-term capital gain rate.
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.