How is a Real Estate Investment Trust (REIT) Taxed?
Investing in Real Estate Investment Trusts (REITs) can be a smart way to tap into the real estate market without the hassle of property management. But with any investment, understanding the tax implications is crucial. REITs are known for their steady stream of income through dividends. However, these dividends can be categorized into three parts for tax purposes:
- Ordinary Income: This is the most common type of REIT dividend and is taxed at your regular income tax rate, which can be up to 37% (returning to 39.6% in 2026), plus a 3.8% surtax on investment income. There’s a silver lining though! Until the end of 2025, you can deduct 20% of qualified REIT dividends, effectively lowering the tax rate to 29.6%.
- Capital Gains: Sometimes, a portion of your REIT dividend may come from capital gains earned by the REIT when they sell a property. This part is taxed at the lower capital gains rate of 20% (plus the 3.8% surtax).
- Return of Capital (ROC): This isn’t actually a profit, but a portion of your original investment being returned to you. ROC isn’t taxed, but it reduces the cost basis of your REIT shares, which can impact capital gains taxes when you eventually sell them.