How REIT Dividends Are Taxed as Ordinary Income, Not Qualified Dividends

REIT dividends are taxed as ordinary income, not may have access to dividends, regardless of how long you hold the shares

A Real Estate Investment Trust (REIT) is a company that owns and operates income-producing real estate — apartment buildings, office parks, shopping centers, data centers. When a REIT distributes its earnings to shareholders, those distributions are taxed as ordinary income at your full marginal tax rate, not at the lower may have access to dividend rate. This is true even if you have owned the REIT shares for years. The tax code treats REIT dividends differently from dividends paid by ordinary corporations.

The reason is structural. REITs are required by law to distribute at least 90 percent of their taxable income to shareholders and are not taxed at the corporate level on that income. In exchange, the distributions they pay out are treated as ordinary income to you, not as may have access to dividends. This is written into Section 857 of the Internal Revenue Code and applies to all REIT distributions, with one narrow exception discussed below.

Key Takeaways

REIT dividends are taxed as ordinary income at your full tax rate, even if you hold the shares for more than one year.
The only exception is a capital gain distribution, which is taxed as a long-term capital gain if the REIT held the property long enough — but this is rare and will be labeled separately on your 1099-DIV.
Because REIT dividends are ordinary income, they do not benefit from the 0%, 15%, or 20% may have access to dividend rates.
Holding REITs in a tax-deferred account like a 401(k) or IRA can reduce the tax drag of ordinary-income distributions.

Why REIT dividends don't may have access to

The may have access to dividend rate applies to dividends paid by C corporations — the standard corporate structure. Those corporations pay tax on their earnings, then distribute the after-tax remainder to shareholders. The may have access to rate rewards shareholders for that double taxation and encourages long-term holding.

REITs work differently. They are pass-through entities that pay no corporate tax. Instead, they pass through their taxable income directly to shareholders, who pay tax on it. Because there is no corporate-level tax, Congress decided not to grant the may have access to dividend rate. The distributions are treated as ordinary income — the same as wages, interest, or short-term capital gains.

This applies to all REIT distributions except one: a capital gain distribution. If a REIT sells a property at a gain and distributes the proceeds, that portion may be taxed as a long-term capital gain (if the REIT held the property for more than one year). Your 1099-DIV will separate this out in Box 2a (long-term capital gains) or Box 2b (unrecaptured Section 1250 gains). Most REIT distributions, however, are ordinary income and will appear in Box 1a of your 1099-DIV.

How this affects your tax bill

The difference between ordinary income and may have access to dividend rates can be substantial. If you are in the 24% tax bracket, may have access to dividends are taxed at 15%. If you are in the 37% bracket, may have access to dividends are taxed at 20%. REIT dividends, by contrast, are taxed at your full marginal rate — 24% or 37% in those examples.

On a $10,000 REIT distribution, the tax difference between ordinary income (24% bracket) and may have access to dividends (15% bracket) is $900. Over time, especially in a taxable account, this compounds. A REIT yielding 4% annually will generate ordinary income every year, with no rate discount.

This is one reason many investors hold REITs in tax-deferred accounts. Inside a 401(k), traditional IRA, or Roth IRA, REIT distributions are not taxed when received. You defer tax on the ordinary income until withdrawal (or never, in the case of a Roth). This eliminates the annual tax drag and lets the distributions compound untaxed.

When to hold REITs in taxable versus tax-deferred accounts

If you have a choice between holding a REIT or a stock fund in a taxable account, the math often favors the stock fund. A diversified stock fund may pay may have access to dividends and generate fewer taxable events. A REIT in the same account will generate ordinary income every year, reducing your after-tax return.

Conversely, if you are filling a 401(k) or IRA, a REIT is a reasonable choice. The tax-deferred wrapper eliminates the ordinary-income penalty. You can hold the REIT for its real estate exposure without paying tax on the distributions until you withdraw.

The trade-off is account space. Most people have limited room in tax-deferred accounts. If you have $50,000 to invest and can only put $23,500 in a 401(k), you must decide what goes where. A common approach: hold tax-inefficient investments (REITs, bonds, actively managed funds) in the tax-deferred account, and hold tax-efficient investments (index funds, growth stocks) in the taxable account.

Capital gain distributions are the exception

Some REITs sell properties or other assets at a profit and distribute the gain to shareholders. This distribution is labeled a capital gain distribution and is taxed differently. If the REIT held the asset for more than one year, the distribution is taxed to you as a long-term capital gain, even if you held the REIT shares for only one day.

Your 1099-DIV will show this separately. Box 2a lists long-term capital gains; Box 2b lists unrecaptured Section 1250 gains (a special category for real estate depreciation recapture). These are taxed at capital gains rates, not ordinary rates. However, most REIT distributions are ordinary income, not capital gains. Capital gain distributions happen when a REIT has a large sale, which is not every year.

Reporting REIT dividends on your tax return

Your REIT will send you a 1099-DIV by January 31 showing all distributions for the prior year. Box 1a shows ordinary income dividends. Box 2a shows long-term capital gains. Box 5 shows may have access to dividend income (which will be zero or nearly zero for most REITs).

You report the ordinary income from Box 1a on your Form 1040, Schedule B (if you have more than $1,500 in dividends) or directly on line 5b of the 1040. You report capital gains from Box 2a on Schedule D. If your REIT is held in a tax-deferred account, you do not receive a 1099-DIV for that holding — the account custodian handles the tax reporting.

If you sold REIT shares during the year at a gain or loss, that is a separate transaction. The sale itself is a capital gain or loss, reported on Schedule D. The dividends received are reported separately, as ordinary income or capital gains depending on the distribution type.

Strategies to reduce the tax impact

Beyond holding REITs in tax-deferred accounts, a few other approaches can help. Tax-loss harvesting can offset REIT gains. If a REIT holding declines in value, you can sell it at a loss and use that loss to offset gains elsewhere — including the ordinary income from REIT dividends (up to $3,000 per year, with carryover). You can then buy a similar REIT to maintain your real estate exposure, as long as you wait more than 30 days to avoid the wash-sale rule.

Another approach is to hold REITs in a donor-advised fund or charitable remainder trust if you are charitably inclined. These structures can shelter REIT distributions from tax while you direct the funds to charity over time.

For most investors, however, the simplest strategy is account location: REITs in the IRA or 401(k), tax-efficient funds in the taxable account. This does not eliminate the ordinary-income tax, but it defers it, which is often enough.

Frequently Asked Questions

Can I get the may have access to dividend rate on REIT dividends if I hold the shares for more than a year?

No. The holding period does not matter. REIT dividends are always ordinary income, regardless of how long you own the shares. The tax code treats REITs as pass-through entities and does not grant them the may have access to dividend rate.

What is a capital gain distribution from a REIT, and how is it taxed?

A capital gain distribution occurs when a REIT sells a property or asset at a profit and distributes the proceeds. If the REIT held the asset for more than one year, you are taxed on the distribution as a long-term capital gain, even if you just bought the REIT shares. Your 1099-DIV will show this in Box 2a. Most REIT distributions are ordinary income, not capital gains.

Should I hold REITs in a 401(k) or in a taxable brokerage account?

If you have a choice, a 401(k) or IRA is usually better. REIT distributions are ordinary income and taxed at your full rate in a taxable account. Inside a tax-deferred account, the distributions compound without annual tax. Save your taxable account space for tax-efficient investments like index funds.

How do I report REIT dividends on my tax return?

Your REIT sends a 1099-DIV by January 31. Ordinary income dividends appear in Box 1a; report this on Schedule B or directly on Form 1040. Capital gain distributions appear in Box 2a; report these on Schedule D. If the REIT is in a tax-deferred account, you do not file a 1099-DIV for that holding.

Can I use REIT losses to offset the ordinary income from REIT dividends?

Yes, through tax-loss harvesting. If a REIT holding declines, you can sell it at a loss and use that loss to offset gains or ordinary income (up to $3,000 per year). You can then buy a different REIT to maintain your real estate exposure, provided you wait more than 30 days to avoid the wash-sale rule.

This guide is for general information only and is not medical, financial, legal, or other professional advice. For decisions specific to your situation, consult a qualified professional. See our Editorial Policy.