How REIT Dividends Are Taxed in the US
REITs are required to distribute at least 90% of their taxable income as dividends. Most of these distributions are taxed as ordinary income — not at the lower qualified dividend rate. This makes the after-tax yield substantially lower than the advertised gross yield for investors in higher tax brackets.
REIT Dividend Components
| Dividend Type | Tax Treatment | Typical Share |
|---|---|---|
| Ordinary income | Taxed at marginal rate | ~70–80% |
| Return of capital | Non-taxable (reduces cost basis) | ~10–20% |
| Capital gain distribution | Long-term cap gains rate | ~5–10% |
Tax-Advantaged Accounts
Holding REITs inside a Roth IRA shields all dividends from taxes permanently (for qualified withdrawals). A Traditional IRA defers taxes. For taxable accounts, high-bracket investors should compare after-tax yields carefully before investing in high-yield REITs.
FAQ
Individual investors may deduct 20% of qualified REIT dividends under IRC Section 199A, effectively reducing the tax rate. For example, a 22% taxpayer's effective rate on qualifying REIT income becomes 17.6%. This deduction phases out for very high incomes.
No — federal tax only. Most states also tax dividend income. Add your state rate to get a more accurate after-tax yield estimate.
※ Assumes all dividends are ordinary income. Actual tax treatment varies by REIT and individual circumstances.