A client is considering investing in a real estate investment trust (REIT). They are particularly interested in the income potential but are unsure how the dividends from REITs are typically taxed for individual investors. Which of the following statements regarding REIT dividend taxation is most accurate?
- AREIT dividends are typically taxed as ordinary income, but a portion may qualify for a Section 199A deduction.
- BREIT dividends are usually tax-exempt at the federal level, similar to municipal bond interest.
- CREIT dividends are generally taxed at the same qualified dividend rates as other corporate stock dividends.
- DREIT dividends are considered capital gains and are taxed only upon the sale of the REIT shares.
Show answer & explanationAnswer & explanation
Correct answer: A. REIT dividends are typically taxed as ordinary income, but a portion may qualify for a Section 199A deduction.
REITs are required to distribute at least 90% of their taxable income to shareholders. These distributions are generally taxed as ordinary income for individual investors, not as qualified dividends. However, a significant portion of REIT dividends may qualify for the Section 199A deduction (also known as the qualified business income deduction), which can effectively reduce the tax rate on these dividends.
Why the other options are wrong
- B. REIT dividends are taxable at the federal level; they are not tax-exempt like municipal bond interest.
- C. REIT dividends are generally not qualified dividends and are taxed at ordinary income rates.
- D. REIT dividends are distributions of income and are taxed when received, not only upon the sale of shares.
REIT Dividend Taxation
Dividends from Real Estate Investment Trusts (REITs) are generally taxed as ordinary income for individual investors, but a portion may be eligible for the Section 199A qualified business income (QBI) deduction, which can reduce the effective tax rate.
- Generally taxed as ordinary income.
- Not typically qualified dividends.
- May qualify for Section 199A deduction (up to 20% QBI).
- REITs must distribute 90% of taxable income.
Memory trick: REIT dividends are 'Ordinary' but get a special 'QBI' treat.