Are REIT Dividends Qualified or Ordinary Income?

REIT dividends are usually taxed as ordinary income, not as qualified dividends. That means the bulk of what a real estate investment trust pays you is taxed at your regular federal rate, which reaches 37% at the top for 2026, rather than the 0%, 15%, or 20% rates that apply to qualified dividends from a typical stock. A portion of a REIT’s payout can qualify for those lower rates in narrow situations, and a separate 20% deduction under Section 199A brings the effective ceiling on the ordinary portion down to about 29.6%.

Why the Default Is Ordinary Income

A REIT must distribute at least 90% of its taxable income to shareholders each year to keep its special tax status.¹ The REIT deducts those distributions from its own taxable income, so it pays essentially no corporate tax on the money it sends out.

That’s why the IRS treats the payout differently on your end. When a regular corporation pays a dividend, the profits behind it were already taxed at the corporate level, and the qualified dividend rate exists to soften that double taxation. REIT distributions skip corporate tax entirely, so they land in your return as ordinary income at your marginal rate. In the top bracket for 2026, that’s 37%.²

When Part of a REIT Dividend Does Qualify

The tax code allows a REIT to designate a portion of its distributions as qualified dividends, but only where the underlying income was already taxed at the corporate level.¹ Two situations account for most of it:

Income from a taxable REIT subsidiary. A REIT can own a subsidiary that runs businesses the REIT itself cannot, such as hotel management. That subsidiary pays regular corporate tax on its profits, and the after-tax earnings can flow through as qualified dividends taxed at 0%, 15%, or 20%.³
Qualified dividends the REIT receives from stock it holds in regular corporations. That qualified status can be passed through to you.

Either way, you have to meet the standard holding period: more than 60 days within the 121-day window centered on the ex-dividend date.⁴ In practice, the qualified slice is small for most REITs. The majority of the payout comes from rental income and mortgage interest that never went through a corporate return.

The Other Boxes on the 1099-DIV

Not every distribution a REIT sends you is a dividend in the tax sense. Two other categories show up regularly and carry their own rules.

Capital Gain Distributions

When a REIT sells property at a profit after holding it more than a year, the gain can be passed through as a capital gain distribution. You pay long-term capital gains rates on these payments regardless of how long you’ve personally held the REIT shares.¹

One catch: unrecaptured Section 1250 gain. When a REIT sells a depreciated building, the portion of the gain tied to past depreciation deductions is taxed at a maximum 25% rate rather than the usual long-term rate.⁵ Your 1099-DIV breaks this out separately when it applies.

Return of Capital

Some distributions are classified as a return of capital, usually because the REIT’s depreciation deductions pulled its taxable income below what it actually paid out in cash. These aren’t taxed when you receive them. They reduce your cost basis in the shares instead. Once your basis reaches zero, further return-of-capital distributions are taxed as capital gains. The tax event is deferred rather than eliminated: your lower basis produces a larger taxable gain when you eventually sell.

The Section 199A Deduction

Congress built a meaningful offset into the ordinary-income treatment through Section 199A. The One Big Beautiful Bill Act, signed on August 4, 2025, made this deduction permanent.⁶ Individual taxpayers deduct 20% of their qualified REIT dividends from taxable income.⁷

The math is simple. On $10,000 in ordinary REIT dividends, you deduct $2,000 and pay tax on $8,000. At the top 37% rate, that’s $2,960 rather than $3,700, an effective rate of 29.6%. The deduction applies whether or not you itemize.

“Qualified REIT dividends” here means the ordinary income portion of REIT distributions. Capital gain distributions and the small slice that qualifies as qualified dividends are excluded because they already get preferential rates. Return of capital is excluded because it isn’t taxed as income at all.

REIT investors get one advantage other pass-through recipients don’t. The 199A deduction on qualified REIT dividends isn’t subject to the W-2 wage and capital limitations that restrict the deduction on other business income. It’s capped only by the overall rule that your total 199A deduction can’t exceed 20% of taxable income minus net capital gains.⁷

The 3.8% Net Investment Income Tax

On top of income tax, REIT distributions can trigger the net investment income tax, a 3.8% surtax under Section 1411 that kicks in when modified adjusted gross income exceeds certain thresholds.⁸ All flavors of REIT distribution count as net investment income: ordinary dividends, capital gain distributions, and the qualified slice.

The thresholds are $200,000 for single filers, $250,000 for joint filers, and $125,000 for married filing separately. They aren’t indexed for inflation, so more taxpayers cross them each year.⁹ For a high-income holder, the real ceiling on ordinary REIT dividends is 29.6% plus 3.8%, or 33.4%. Capital gain distributions can hit 20% plus 3.8%, or 23.8%.

REITs Held Inside Retirement Accounts

Holding REITs in a traditional IRA, 401(k), or Roth IRA sidesteps most of the sorting above. In a traditional IRA or 401(k), the distributions grow tax-deferred and are taxed as ordinary income only when you withdraw them. In a Roth IRA, qualified withdrawals are tax-free, so neither the ordinary/qualified split nor the NIIT applies.

The trade-off is that you lose the Section 199A deduction inside a retirement account, because the deduction only reduces taxable income you actually report. For lower-bracket investors, a taxable account with the 199A write-off can produce a lower effective rate than a traditional IRA that converts everything to ordinary income on withdrawal. The calculus flips for high-income investors facing the top rate plus the 3.8% surtax, where a Roth eliminates both.

State Taxes

Federal treatment isn’t the whole picture. Most states with an income tax treat REIT dividends as ordinary income, adding anywhere from roughly 2% to over 13% on top of the federal rate. About eight states impose no individual income tax. A handful of states don’t conform to Section 199A, so the 20% deduction that helps on your federal return may not carry to the state return. Check your state’s treatment before assuming the federal figures tell the whole story.

Reading Your 1099-DIV

Your brokerage sends Form 1099-DIV each year with the classification already done.¹⁰ The boxes that matter for REIT holders:

Box 1a, total ordinary dividends: everything the REIT classified as ordinary income, including the portion eligible for Section 199A.¹¹
Box 1b, qualified dividends: the small portion, if any, eligible for long-term capital gains rates. For most REITs, this is far smaller than Box 1a.
Box 2a, total capital gain distributions: property-sale gains passed through to you, taxed at long-term rates.
Box 3, nondividend distributions: return of capital, not currently taxable, but reduces your cost basis.
Box 5, Section 199A dividends: the amount eligible for the 20% deduction, which feeds into Form 8995 or 8995-A.¹¹

Box 5 is the one REIT investors most often overlook. Missing it leaves the 199A deduction on the table, which can cost hundreds or thousands of dollars depending on the size of the position. Tax software usually populates the deduction automatically once the 1099-DIV data is entered, but verify that the Box 5 amount carried through to Form 8995 before filing.

1
Office of the Law Revision Counsel. 26 USC 857 – Taxation of Real Estate Investment Trusts and Their Beneficiaries
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
4
Cornell Law Institute. Definition – Qualified Dividend Income From 26 USC 1(h)(11)
5
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
6
Internal Revenue Service. One, Big, Beautiful Bill Provisions
7
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
8
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
9
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
10
Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions
11
Internal Revenue Service. Instructions for Form 1099-DIV