What Are REITs and How Do They Work?

A real estate investment trust (REIT) is a company that owns or finances income-producing real estate and passes most of that income to its shareholders as dividends. To qualify under federal tax law, a REIT must keep at least 75% of its assets in real estate, cash, and government securities, earn at least 75% of its gross income from real estate sources such as rent and mortgage interest, have at least 100 shareholders, and pay out at least 90% of its taxable income each year. In return, it generally owes no corporate income tax on the income it pays out, and shareholders pay tax on the dividends instead. You can own REITs by buying listed REIT shares, or a fund that holds many REITs, in a brokerage account or IRA.

What tests does a company have to pass to be a REIT?

Congress created REITs in 1960, and the qualification rules are in sections 856 and 857 of the Internal Revenue Code. A company elects REIT status on its tax return and then has to keep passing these tests:

The 90% figure is a minimum. A REIT pays regular corporate income tax on any taxable income it keeps, and the SEC notes that most REITs pay out at least 100% of their taxable income.

How do REITs earn and pay out income?

Equity REITs own property, such as apartments, warehouses, shopping centers, offices, cell towers, and data centers, and collect rent. Mortgage REITs lend instead: they make real estate loans or buy mortgage-backed securities (bonds backed by pools of mortgages) and collect the interest. The SEC also distinguishes REITs from other real estate companies: a REIT buys or develops properties to operate them as part of its own portfolio, not to resell them.

REITs borrow, too. In the second quarter of 2026, debt made up 34.4% of equity REITs' total capitalization (their debt plus the market value of their shares), according to Nareit, the REIT industry's trade association.

Dividend yield is a year of dividends at the current rate divided by the share price. At the end of September 2026, the FTSE Nareit All Equity REITs index yielded 3.93% and the FTSE Nareit Mortgage REITs index yielded 15.68%, compared with 1.03% for the S&P 500. A yield rises when the share price falls and the dividend does not: the mortgage REIT index lost 13.7% in September 2026, and its yield rose from 13.15% at the end of August. How REIT dividend yields work covers what moves yields and the signs that a dividend may be cut.

What are the main ways to own REITs?

A REIT fund spreads one purchase across many REITs, which FINRA notes gives broader real estate exposure than a single REIT. Before you buy a listed or non-traded REIT, you can confirm its SEC registration and read its annual reports and prospectus on the SEC's EDGAR database.

The step-by-step guide to buying REITs covers which account to use, how much money each route takes, and how to place the order. If you are choosing between REIT shares and buying a rental yourself, REITs vs direct real estate ownership compares cash needed, borrowing, and taxes with a dollar example.

What types of REITs are there?

REITs are grouped three ways. By what they hold, they are equity REITs, mortgage REITs, or hybrid REITs that do both. By listing status, they are publicly traded, public non-traded, or private, as in the table above. By property type, Nareit's indexes sort listed equity REITs into 13 sectors, from industrial and office to timberland and data centers, and track mortgage REITs as a separate group.

The FTSE Nareit All REITs index held 180 REITs at the end of August 2026, and Nareit estimates that listed and unlisted REITs together own more than $4.5 trillion of commercial real estate. Health care, retail, and data center REITs were the three largest sectors, together about 46% of the index's market value, while mortgage REITs were about 4%. Types of REITs explained compares each sector's income source, lease length, and main risk.

How are REIT dividends taxed?

In a taxable brokerage account, most REIT dividends are taxed as ordinary income at your regular rate, not at the lower rates that apply to most other corporate dividends. The Form 1099-DIV you receive after each year splits the payout into parts that are taxed differently:

• Box 5, section 199A dividends. You can generally deduct 20% of these qualified REIT dividends if you held the shares for more than 45 days of the 91-day window centered on the ex-dividend date (the first day a buyer of the shares does not get the dividend), subject to an overall cap based on your taxable income. A July 2025 law (Public Law 119-21) made the deduction permanent; it had been set to end after 2025. At a 24% tax rate, the deduction cuts the tax on $1,000 of these dividends from $240 to $192.
• Box 2a, capital gain distributions. These are taxed as long-term capital gains, however long you have owned the shares, except that any part shown in box 2b (gain from depreciation on real estate the REIT sold) is taxed at up to 25%.
• Box 3, nondividend distributions. This return of capital is not taxed when paid. It lowers your cost basis (generally what you paid for the shares), which raises your taxable gain when you sell, and once your basis reaches zero, any further return of capital is taxed as a capital gain.

Weighted by market value, 79% of the dividends listed REITs paid for 2025 were ordinary income (77% qualified as section 199A dividends), 11% were long-term capital gains, and 10% were return of capital, according to Nareit. In an IRA or 401(k), the account's own rules decide the tax, and you generally will not get a Form 1099-DIV for dividends paid into an IRA. REIT tax treatment works through each part of a payout with an example.

What are the main risks?

• Price swings. FINRA notes that listed REITs are easier to sell than non-traded REITs but more prone to price swings. In 2022, as the 10-year Treasury yield rose from 1.52% to 3.88%, the FTSE Nareit All Equity REITs index lost 24.95% with dividends included.
• Mortgage REIT returns. The mortgage REIT index yielded 13.15% at the end of August 2026, but over the five years through August it returned -0.66% a year with dividends included, because its share prices fell 11.83% a year.
• Non-traded REITs. The SEC warns that these generally cannot be sold readily and that their per-share value can be hard to determine. They often pay distributions larger than their funds from operations, a common measure of REIT earnings, and may cover the gap with money from new investors or borrowing, which reduces the value of the shares. They typically have an outside manager paid fees based on acquisitions and assets under management, which may not line up with shareholders' interests.

REIT risks every investor should understand covers these and other risks, including what happens when a REIT's debt comes due.