REIT Tax Treatment: What Investors Need to Know

In a taxable brokerage account, most of a REIT dividend is taxed as ordinary income at your regular rate, but the part your Form 1099-DIV reports as Section 199A dividends (box 5) qualifies for a 20% deduction if you held the shares for more than 45 days around the ex-dividend date, the first day a new buyer of the shares would not get the upcoming dividend. Capital gain distributions (box 2a) are taxed at long-term capital gain rates, and return of capital (box 3) is not taxed when paid but lowers your cost basis, generally what you paid for the shares. Nareit puts the 2025 mix, weighted by market value, at 79% ordinary income (including 77% Section 199A dividends), 11% long-term capital gains, and 10% return of capital.

How is each box on Form 1099-DIV taxed?

Your REIT or broker reports each type of distribution in its own box. For 2026, federal ordinary income tax rates run from 10% to 37%. Long-term capital gain rates are 0% on taxable income up to $49,450 for single filers ($98,900 for joint filers), 15% up to $545,500 ($613,700 joint), and 20% above that.

A dividend a REIT declares in October, November, or December, payable to shareholders of record on a date in one of those months, counts as received on December 31 if the REIT pays it the following January, so it goes on the earlier year's Form 1099-DIV and tax return. States apply their own rules: California, for example, taxes all capital gains as ordinary income and does not allow the Section 199A deduction. What REITs are and how they work explains the payout rules that make most REIT income reach you as dividends.

How does the 20% Section 199A deduction work?

A qualified REIT dividend is any REIT dividend that is not a capital gain dividend or a qualified dividend, and your Form 1099-DIV reports these in box 5. You can deduct 20% of them whether you itemize or take the standard deduction. The IRS says this part of the deduction is not limited by the W-2 wage or property tests that can cap the deduction for business income, although your total Section 199A deduction cannot exceed 20% of taxable income minus net capital gain. A 2025 law, Public Law 119-21, removed the deduction's scheduled end after 2025, so it continues for 2026 and later years.

The deduction applies only if you held the shares for more than 45 days during the 91-day period that begins 45 days before the ex-dividend date. A REIT may report a dividend in box 5 when it cannot tell whether you met the test, so check the dates yourself if you bought shortly before an ex-dividend date or sold soon after one. Section 199A dividends from REIT mutual funds and ETFs carry a similar holding-period requirement for your fund shares. The Section 199A deduction for real estate investors explains when rental income qualifies under the same law.

How does return of capital change your cost basis?

Each box 3 amount comes off your cost basis in the year you receive it. Once your basis reaches zero, further nondividend distributions are taxed as capital gains in the year you receive them, long-term or short-term depending on how long you have held the shares. If you bought shares in several lots and cannot identify which shares a distribution applies to, reduce the basis of your earliest purchases first.

Example: you buy 200 shares at $40, for a basis of $8,000. Over three years, box 3 totals $600, which lowers your basis to $7,400. If you later sell for $45 a share, or $9,000, your gain is $9,000 - $7,400 = $1,600 instead of $1,000. The $600 is not taxed until you sell, and then at long-term rates if you have held the shares more than a year.

For shares bought after 2010, which the IRS generally calls covered securities, your broker should report your basis on Form 1099-B when you sell. For older shares, keep your own record of every box 3 amount.

When does the 3.8% net investment income tax apply?

The net investment income tax (NIIT) is 3.8% of the smaller of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds $200,000 for single and head of household filers, $250,000 for married couples filing jointly, or $125,000 for married people filing separately. These thresholds are not indexed for inflation. Net investment income includes dividends and capital gains, so ordinary REIT dividends, capital gain distributions, and gains on REIT shares you sell all count.

Example: you file single with MAGI of $230,000, including $12,000 of REIT dividends and capital gain distributions and no other investment income. Your MAGI is $30,000 over the threshold and net investment income is $12,000, so the tax is 3.8% of the smaller amount: $12,000 x 3.8% = $456.

What do the taxes look like on one year of distributions?

Say you file single with $150,000 of taxable income in 2026, which puts you in the 24% ordinary bracket and the 15% capital gain bracket, and your Form 1099-DIV shows $4,000 in box 1a (all of it also in box 5), $500 in box 2a, and $500 in box 3:

1. Box 5: $4,000 minus the 20% deduction of $800 leaves $3,200, taxed at 24%: $768.
2. Box 2a: $500 taxed at 15%: $75.
3. Box 3: no tax this year; your cost basis falls by $500.
4. Total federal income tax: $768 + $75 = $843, or 16.9% of the $5,000 received. Without the Section 199A deduction, the $4,000 of ordinary dividends would cost $960 instead of $768.

Assuming your MAGI is under $200,000, the 3.8% tax does not apply. Because most of a REIT's payout is taxed this way, compare yields on an after-tax basis; REIT dividend yields explained compares pretax yields by sector.

Should you hold REITs in an IRA instead?

In a traditional IRA, REIT dividends are not taxed when paid, but taxable withdrawals are taxed as ordinary income, so the 20% deduction, capital gain rates, and return-of-capital deferral do not carry over to the money you take out. Withdrawals before age 59½ generally also owe a 10% additional tax unless an exception applies. A qualified Roth IRA withdrawal, generally one taken at 59½ or later once five years have passed since the first tax year you contributed to a Roth IRA, is tax-free. IRA distributions are not net investment income. The IRA's deferral helps most with REIT dividends you will reinvest until retirement; dividends you plan to spend before 59½ avoid the 10% additional tax when they are paid into a taxable account. REIT investing in retirement covers which account to use and required withdrawals, and REITs vs direct real estate ownership compares REIT taxes with the tax rules for owning a rental.