PFF dividends are a mix of qualified and ordinary income, not one or the other. Each year’s distributions from the iShares Preferred and Income Securities ETF break into several categories: a qualified portion taxed at long-term capital gains rates, an ordinary portion taxed at your regular federal income rate, and often some Section 199A dividends and return of capital. The split shifts year to year based on what the underlying preferred securities actually paid, so you won’t know your exact numbers until BlackRock publishes its year-end tax supplement and your broker issues Form 1099-DIV.
The Two Rates Your PFF Income Gets Split Between
The qualified portion is taxed at long-term capital gains rates. For 2026, those brackets are 0% on taxable income up to $49,450 single or $98,900 joint, 15% from there up to $545,500 single or $613,700 joint, and 20% above those thresholds.1IRS. Revenue Procedure 2025-32
The ordinary portion stacks on top of your other income at your marginal rate. Federal ordinary rates for 2026 run from 10% on the first $12,400 of taxable income (single) up to 37% on income above $640,600 single or $768,700 joint.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The gap between a 20% qualified ceiling and a 37% ordinary ceiling is real money on a fund built for high yield, which is the reason the split matters.
Unlike a blue-chip stock that pays a fully qualified dividend, PFF’s qualified percentage moves each year with the composition of what the fund collected. Expect a meaningful share of every annual payout to be taxed at ordinary rates.
Why So Much of PFF’s Income Is Taxed as Ordinary
Three types of holdings in the fund push distributions into the ordinary column.
REIT Preferred Stock
PFF holds a significant allocation of preferreds issued by Real Estate Investment Trusts. REITs generally don’t pay corporate-level tax on earnings they distribute, and because that income was never taxed at the corporate level, the IRS doesn’t grant it qualified treatment at the shareholder level. Most of what flows through from REITs is ordinary, though a portion may come through as Section 199A dividends with their own deduction.
Debt-Like Preferred Securities
Some fund holdings are structured more like bonds than equity. These instruments, sometimes called “baby bonds” for their $25 par value, pay interest rather than dividends. Interest income never qualifies for the lower dividend rate. The check looks the same to you; the tax treatment is worse.
Foreign Issuers Without a U.S. Tax Treaty
PFF may hold preferreds issued by foreign corporations. For those dividends to qualify, the issuer has to be incorporated in a country with a comprehensive income tax treaty with the United States, or the stock has to trade on a U.S. exchange. If neither is true, that issuer’s distributions are automatically ordinary.3Legal Information Institute. 26 USC 1(h)(11)(C)(i) – Definition of Qualified Foreign Corporation
The Holding Period You Have To Meet
Even the portion PFF reports as qualified only gets the lower rate if you personally held the shares long enough. The rule: more than 60 days during the 121-day window that begins 60 days before the ex-dividend date. You count the day you sell but not the day you buy.4Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
Miss that window and every dividend on that position becomes ordinary income no matter what the fund reports. This catches people who buy PFF just before a distribution and sell shortly after. The rule exists specifically to keep investors from grabbing a tax-advantaged payout without any real economic exposure to the security.
Section 199A Dividends: A Third Category
Some of what PFF pays out is classified as Section 199A dividends, which represent the fund’s pass-through of qualified REIT dividends. These are not the same as qualified dividends. They’re taxed at ordinary rates, but eligible shareholders can deduct 20% of the amount.5Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
The deduction was originally set to expire after 2025 but was made permanent through the One, Big, Beautiful Bill Act. For someone in the 37% bracket, the effective rate on Section 199A dividends comes out to roughly 29.6% after the deduction. Better than a full ordinary rate, still above the 20% qualified ceiling.
To claim it, you need to have held the shares generating the REIT dividends for more than 45 days. Your broker reports Section 199A dividends in Box 5 of Form 1099-DIV.6Internal Revenue Service. Instructions for Form 1099-DIV You calculate the deduction on Form 8995 or 8995-A, and you don’t have to itemize to take it.7Internal Revenue Service. Instructions for Form 8995-A
Return of Capital Isn’t Taxed Now, But It Isn’t Free
PFF distributions occasionally include a return of capital piece, which isn’t taxed the year you receive it. It reduces your cost basis in the shares instead. That increases your capital gain, or shrinks your capital loss, whenever you sell.
Once your basis reaches zero, further return of capital becomes taxable as a capital gain, long-term or short-term depending on how long you’ve held.8Internal Revenue Service. Publication 550 – Investment Income and Expenses Return of capital appears in Box 3 of your 1099-DIV. If your broker adjusts your basis automatically, it’s worth checking the numbers against Box 3 each year.9Internal Revenue Service. Mutual Funds (Costs, Distributions, Etc.)
The 3.8% Net Investment Income Tax
Higher earners owe an additional 3.8% surtax on net investment income, which includes every PFF dividend and any gain from selling shares. It applies when modified adjusted gross income tops $200,000 single or $250,000 joint. Those thresholds aren’t indexed for inflation, so more taxpayers cross them each year.10Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
The surtax sits on top of whatever rate already applies. A high earner can face a combined 40.8% federal rate on the ordinary portion of PFF and up to 23.8% on the qualified portion. It’s reported on Form 8960.11IRS.gov. 2025 Instructions for Form 8960 – Net Investment Income Tax
Where the Numbers Show Up on Form 1099-DIV
Your broker issues Form 1099-DIV after year-end. The boxes that matter for PFF are:
- Box 1a, total ordinary dividends, which is the full distribution.
- Box 1b, the qualified portion inside that total, eligible for capital gains rates.
- Box 3, nondividend distributions (return of capital), which reduce your basis.
- Box 5, Section 199A dividends, used to figure the 20% deduction.6Internal Revenue Service. Instructions for Form 1099-DIV
BlackRock publishes a year-end tax supplement with the exact percentages falling into each category. Cross-checking that against your 1099-DIV is worth a few minutes; brokerages sometimes issue preliminary numbers that don’t match the fund’s final figures.
Whether To Hold PFF in an IRA or 401(k)
One way to sidestep the qualified-versus-ordinary-versus-Section-199A puzzle is to hold PFF inside a traditional IRA, Roth IRA, or 401(k). In a traditional account, distributions compound without annual taxation, and you pay ordinary rates when you withdraw in retirement. In a Roth, qualified withdrawals come out tax-free.
That shelter matters more for PFF than for a stock index fund that pays mostly qualified dividends, because a large share of PFF’s income is already taxed at ordinary rates in a taxable account. The trade-off is that you give up qualified rates on the portion that would have qualified and lose access to the Section 199A deduction. For most investors in the 22% bracket or above, the math still favors the sheltered account. If you plan to hold PFF long-term for income, decide where it belongs before defaulting to a taxable brokerage.