FAQs
Avoiding REIT dividend taxation
If you own REITs in an IRA, you won't have to worry about dividend taxes each year, nor will you have to pay taxes in the year in which you sell a REIT at a profit. In a traditional IRA, you won't owe any taxes until you withdraw money from the account.
What are the tax benefits of being a REIT? ›
Tax benefits of REITs
Individual REIT shareholders can deduct 20% of the taxable REIT dividend income they receive (but not for dividends that qualify for the capital gains rates). There is no cap on the deduction, no wage restriction and itemized deductions are not required to receive this benefit.
Is it bad to hold REITs in a taxable account? ›
REITs and REIT Funds
Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.
What is the 90 rule for REITs? ›
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
How much of REIT income is taxed? ›
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.
How do REITs avoid double taxation? ›
Avoiding Double Taxation
Unlike many companies however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.
What are the pros and cons of REITs? ›
Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.
Do you pay taxes on dividends from REITs? ›
By default, all dividends distributed by a REIT are considered ordinary, or non-qualified, and are taxed as ordinary income. REIT dividends can be qualified if they meet certain IRS requirements.
Does a REIT file a tax return? ›
Generally, a REIT must file its income tax return by the 15th day of the 4th month after the end of its tax year.
What are the downsides of REITs? ›
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts. However, REIT stocks are only as good as the properties they own — and some real estate sectors may be better positioned than others.
How long should you hold a reit? ›
REITs should generally be considered long-term investments
This is especially true if you're planning to invest in non-traded REITs since you won't be able to easily access your money until the REIT lists its shares on a public exchange or liquidates its assets. In many cases, this can take around 10 years to occur.
What is the REIT 10-year rule? ›
The final regulations (i) provide a 10-year “transition rule” that grandfathers current structures, subject to certain requirements, and thus allows certain entities to continue to be treated as D-REITs for ten years and (ii) narrow the scope of the “look through” rule, pursuant to which REIT stock owned by certain ...
How much of my retirement should be in REITs? ›
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
What is bad income for REITs? ›
This is known as the geographic market test. Section 856 (d)(2) (C) excludes impermissible tenant service income (ITSI) from the definition of rent from real property, making it “bad income” for the 75% and 95% REIT gross income tests.
How do I get my money out of a REIT? ›
While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
Are REITs taxed as ordinary income? ›
By default, all dividends distributed by a REIT are considered ordinary, or non-qualified, and are taxed as ordinary income. REIT dividends can be qualified if they meet certain IRS requirements.
Should I own REITs in a brokerage account? ›
While some REITs offer the reinvestment of investor's dividends, the investor can't avoid the dividend tax obligations. REITs do qualify for the 20% pass-through deduction, but most investors will need to pay a large amount of taxes on REIT dividends if they hold REITs in a standard brokerage account.