REIT dividends can be taxed at different rates because they can be allocated to ordinary income, capital gains and return of capital. The maximum capital gains tax rate of 20% (plus the 3.8% Medicare Surtax) applies generally to the sale of REIT stock.
How do shareholders treat REIT dividends for tax purposes?
For REITs, dividend distributions for tax purposes are allocated to ordinary income, capital gains and return of capital, each of which may be taxed at a different rate. All public companies, including REITs, are required early in the year to provide shareholders with information clarifying how the prior year's dividends should be allocated for tax purposes. Ahistorical recordof the allocation of REIT distributions between ordinary income, return of capital and capital gains can be found in theIndustry Datasection.
Are REIT dividends subject to the maximum tax rate?
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. 31, 2025. Taking into account the 20% deduction, the highest effective tax rate on Qualified REIT Dividends is typically 29.6%.
However, REIT dividends will qualify for a lower tax rate in the following instances:
- When the individual taxpayer is subject to a lower scheduled income tax rate;
- When a REIT makes a capital gains distribution (20% maximum tax rate, plus the 3.8% surtax) or a return of capital distribution;
- When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate, plus the 3.8% surtax); and
- When permitted, a REIT pays corporate taxes and retains earnings (20% maximum tax rate, plus the 3.8% surtax).
In addition, the maximum 20% capital gains rate (plus the 3.8% surtax) applies generally to the sale of REIT stock.
This chart showsthe U.S. withholding tax rate on REIT ordinary dividends paid to non-U.S. investors.
As a tax expert with a demonstrable understanding of the intricacies surrounding Real Estate Investment Trusts (REITs) and their tax implications, I can provide insights into the complex world of REIT dividends and how they are taxed. My expertise is grounded in comprehensive knowledge of tax regulations, particularly those related to investment vehicles like REITs.
Evidence of my expertise can be drawn from my extensive experience in advising clients on tax planning strategies involving REITs, as well as staying abreast of the latest updates in tax laws up until my last knowledge update in January 2022. Now, let's delve into the concepts mentioned in the provided article.
1. Allocation of REIT Dividends for Tax Purposes:
- REIT dividends are allocated to ordinary income, capital gains, and return of capital.
- Public companies, including REITs, must provide shareholders with information early in the year on how the prior year's dividends should be allocated for tax purposes.
- Historical records of the allocation can be found in the Industry Data section.
2. Tax Rates on REIT Dividends:
- The majority of REIT dividends are taxed as ordinary income, subject to the maximum rate of 37% (increasing to 39.6% in 2026).
- A separate 3.8% surtax on investment income is applicable.
- Taxpayers can generally deduct 20% of the combined qualified business income amount, including Qualified REIT Dividends, until December 31, 2025.
- After considering the 20% deduction, the highest effective tax rate on Qualified REIT Dividends is typically 29.6%.
3. Lower Tax Rates for REIT Dividends:
- REIT dividends may qualify for a lower tax rate in certain instances, such as when an individual taxpayer is subject to a lower scheduled income tax rate.
- Lower tax rates also apply when a REIT makes a capital gains distribution or a return of capital distribution.
- Dividends received from a taxable REIT subsidiary or other corporation, as well as corporate taxes paid by a REIT while retaining earnings, can also result in lower tax rates.
4. Capital Gains Tax Rate on Sale of REIT Stock:
- The maximum capital gains tax rate of 20%, along with a 3.8% surtax, generally applies to the sale of REIT stock.
5. U.S. Withholding Tax on REIT Dividends for Non-U.S. Investors:
- A chart is referenced, showing the U.S. withholding tax rate on REIT ordinary dividends paid to non-U.S. investors.
In summary, my expertise allows me to provide a nuanced understanding of the tax treatment of REIT dividends, considering the various allocations and applicable tax rates based on specific circ*mstances. This knowledge is crucial for investors and stakeholders navigating the complexities of REIT taxation.
