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. A historical record of the allocation of REIT distributions between ordinary income, return of capital and capital gains can be found in the Industry Data section.
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 39.6 percent, plus a separate 3.8 percent surtax on investment income.
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 percent maximum tax rate, plus the 3.8 percent surtax) or a return of capital distribution;
- When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20 percent maximum tax rate, plus the 3.8 percent surtax); and
- When permitted, a REIT pays corporate taxes and retains earnings (20 percent maximum tax rate, plus the 3.8 percent surtax).
In addition, the maximum 20 percent capital gains rate (plus the 3.8 percent surtax) applies generally to the sale of REIT stock.