Are Realty Income Dividends Qualified or Ordinary?

Realty Income dividends are overwhelmingly ordinary, not qualified. In 2024, about 70% of the company’s common stock distribution was taxed as ordinary income and roughly 30% was classified as return of capital, with essentially none designated as qualified dividend income.¹ That split is a direct consequence of the company’s structure as a Real Estate Investment Trust, and it changes how you should think about the tax bill on those monthly checks.

Why the Dividends Are Ordinary

A REIT avoids corporate income tax by distributing at least 90% of its taxable income to shareholders each year.² Because Realty Income deducts those payouts from its own taxable income and pays little or no corporate tax on them, the IRS treats the dividends as ordinary income to shareholders rather than as qualified dividends.

Ordinary income is taxed at your marginal rate, which for 2026 runs from 10% to 37% depending on filing status and total income.³ Qualified dividends from ordinary corporations, by contrast, are taxed at long-term capital gains rates of 0%, 15%, or 20%. For a top-bracket investor, the gap between 37% and 20% is the practical cost of the REIT wrapper, though a separate deduction discussed below narrows it.

The Return-of-Capital Portion

A meaningful slice of what Realty Income pays out is not currently taxable. In 2024, about 30.4% of the common stock distribution, roughly $0.95 of every $3.13 per share, was classified as return of capital.¹

Return of capital reduces your cost basis in the shares instead of creating income for the year. Buy at $60, receive $2 in return of capital over time, and your adjusted basis becomes $58. The tax is deferred, not erased: when you sell, the lower basis produces a larger taxable gain. If cumulative return-of-capital distributions ever drive your basis to zero, any further amounts are taxed as capital gains in the year received. The figure shows up in Box 3 of Form 1099-DIV as a “Nondividend Distribution.”⁴ Long-term holders should track adjusted basis carefully.

When Any of It Might Be Qualified

A REIT can pass through a qualified dividend portion only when the underlying earnings have already been taxed at the corporate level, typically through a Taxable REIT Subsidiary or from dividends the REIT itself receives from non-REIT corporations. Section 857(c)(2) allows those already-taxed earnings to travel through as qualified dividend income.²

For Realty Income, that portion tends to be very small or nothing. The company’s 2024 tax allocation reported no qualified dividend designation for its common stock.¹ That pattern is typical for equity REITs whose income comes almost entirely from property rents.

Even when a qualified amount is designated, you have to hold the shares for at least 61 days during the 121-day window that begins 60 days before the ex-dividend date to claim the lower rate.⁵ Miss the holding period and the amount reverts to ordinary rates.

Capital Gain Distributions From Property Sales

When Realty Income sells a property at a profit, part of that gain can be passed to shareholders as a capital gain dividend, taxed at long-term capital gains rates rather than ordinary rates. These show up in Box 2a of Form 1099-DIV.⁴

A portion of that may be unrecaptured Section 1250 gain, representing depreciation previously deducted on the sold property. It is taxed at a maximum 25% rate and reported separately in Box 2b. Whether Section 1250 gain appears in a given year depends on the company’s property sales activity.

The Section 199A Deduction Softens the Blow

Section 199A lets individual investors deduct up to 20% of qualified REIT dividends from taxable income.⁶ It applies to the ordinary income portion of Realty Income’s distributions, not to capital gains or return of capital. An investor in the 37% bracket sees an effective federal rate of about 29.6% on those dividends after the deduction, which meaningfully narrows the gap with the qualified dividend rate.

The deduction is available whether you itemize or take the standard deduction, and it is capped at the lesser of 20% of qualified REIT dividends or 20% of taxable income minus net capital gains. For most individual investors, the REIT dividend figure is the binding number. It reports in Box 5 of Form 1099-DIV, and you calculate the deduction on Form 8995 or Form 8995-A. Legislation passed in 2025 extended the deduction beyond its original scheduled expiration, so it remains available for the 2026 tax year.

The 3.8% Net Investment Income Tax

Higher-income investors owe an additional 3.8% surtax on net investment income, and it reaches all categories of Realty Income distributions, including ordinary dividends, capital gain dividends, and any return of capital received after basis is exhausted. The tax applies when modified adjusted gross income exceeds $200,000 for single filers, $250,000 for joint filers, or $125,000 for married filing separately.⁷ Those thresholds are not indexed for inflation.

For a top-bracket investor who also owes NIIT, the combined federal rate on the ordinary dividend portion reaches 40.8%. Section 199A can lower the underlying ordinary income tax but not the surtax itself.

Where to Hold the Shares

Because Realty Income dividends are taxed at ordinary rates in a taxable account, holding the shares inside a traditional IRA, Roth IRA, or 401(k) can defer or eliminate the annual tax hit. In a Roth, qualified withdrawals are tax-free, so the dividends never generate federal income tax. In a traditional IRA or 401(k), tax is deferred until withdrawal.

There is a trade-off. The Section 199A deduction only helps in a taxable account, since dividends inside an IRA are not currently taxed at all. For investors in higher brackets, the deferral or exemption of a retirement account typically outweighs the 199A benefit; for investors in lower brackets, a taxable account may work fine.

Standard equity REIT dividends received inside an IRA generally do not trigger unrelated business taxable income, because the IRS excludes dividends and other investment income from UBTI for tax-exempt accounts.⁸ UBTI mainly concerns debt-financed investments such as leveraged partnerships, not plain REIT stock in a retirement account.

Reading Your 1099-DIV for Realty Income

Your broker issues Form 1099-DIV by January 31 for the prior tax year. A handful of boxes tell the whole story for Realty Income holders.

Box 1a, Total Ordinary Dividends: the full taxable dividend amount for the year, including any qualified portion.⁹
Box 1b, Qualified Dividends: the slice of Box 1a eligible for long-term capital gains rates. For most Realty Income shareholders this is small or zero.
Box 2a, Total Capital Gain Distributions: gains from property sales, taxed at long-term capital gains rates.
Box 2b, Unrecaptured Section 1250 Gain: depreciation recapture portion of capital gain distributions, taxed at up to 25%.
Box 3, Nondividend Distributions: return of capital, which reduces basis rather than creating current income.
Box 5, Section 199A Dividends: the amount eligible for the 20% qualified business income deduction, entered on Form 8995 or 8995-A.

Realty Income typically publishes its official dividend tax allocation in January or February following the tax year, and brokers incorporate that data into the 1099-DIV. If your form arrives before the allocation is finalized, a corrected version may follow. When you file, compare the Box 5 figure against your ordinary dividend amount; only the Box 5 number qualifies for the 199A deduction.

1
Realty Income. Realty Income Announces 2024 Dividend Tax Allocation
2
Office of the Law Revision Counsel. 26 USC 857 – Taxation of Real Estate Investment Trusts and Their Beneficiaries
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Internal Revenue Service. Form 1099-DIV – Dividends and Distributions
5
Internal Revenue Service. IRS Gives Investors the Benefit of Pending Technical Corrections on Qualified Dividends
6
Internal Revenue Service. Qualified Business Income Deduction
7
Internal Revenue Service. Topic No. 559 – Net Investment Income Tax
8
Internal Revenue Service. Publication 598 – Tax on Unrelated Business Income of Exempt Organizations
9
Internal Revenue Service. Instructions for Form 1099-DIV