Real estate investment trusts are required by federal law to distribute at least 90 percent of their taxable income to shareholders every year, and in practice most push that number close to 100 percent to avoid corporate tax on anything they keep. That legal floor is why REITs consistently rank among the highest-yielding investments available. As of January 2026, equity REITs averaged roughly a 4 percent dividend yield, while mortgage REITs averaged nearly 12 percent.1Nareit. High Yields, Strong Returns: mREITs Were a Stand Out in 2025 What you actually receive depends on the type of property the trust owns, the leases behind that property, and how much of the reported cash flow is really available to pay out.
The 90 Percent Rule and Why Most REITs Pay More
The distribution requirement sits in 26 U.S. Code § 857: a REIT must distribute at least 90 percent of its taxable income, calculated before the deduction for dividends paid and excluding net capital gains, to keep its special tax status.2Office of the Law Revision Counsel. 26 USC 857 – Taxation of Real Estate Investment Trusts and Their Beneficiaries In exchange, the trust deducts the dividends it pays from its own taxable income, which effectively removes the corporate layer of tax on distributed earnings. A regular corporation pays tax on profits and its shareholders pay tax again on dividends; a REIT skips the first round on everything it sends out.
Ninety percent is the minimum, not the aim. Any taxable income the trust keeps is taxed at the standard 21 percent corporate rate.2Office of the Law Revision Counsel. 26 USC 857 – Taxation of Real Estate Investment Trusts and Their Beneficiaries A separate 4 percent excise tax under 26 U.S. Code § 4981 applies when calendar-year distributions fall short of a stricter threshold: 85 percent of ordinary income plus 95 percent of capital gain net income.3Office of the Law Revision Counsel. 26 USC 4981 – Excise Tax on Undistributed Income of Real Estate Investment Trusts Together, the corporate rate and the excise make retained income expensive enough that most trusts pay out close to everything. The headline 90 percent understates what a typical REIT actually distributes.
Typical Yields by REIT Type
What a REIT owns is the biggest driver of the check size. Equity REITs hold physical properties and collect rent. Mortgage REITs hold real estate debt and earn the spread between borrowing costs and interest income. The two produce very different payouts. As of January 2026, the FTSE NAREIT mortgage REIT index averaged roughly 12 percent, against about 4 percent for equity REITs.1Nareit. High Yields, Strong Returns: mREITs Were a Stand Out in 2025 Mortgage REIT yields also swing more with interest rates.
Within equity REITs, the lease structure matters as much as the property type. Retail and industrial trusts that use triple-net leases push property taxes, insurance, and maintenance onto tenants, so a larger share of rent reaches shareholders. Warehouse and data center properties are usually leased long-term to creditworthy corporate tenants, which produces steady cash flow. Healthcare and office buildings need heavier capital spending to modernize space and fit out new tenants, and those recurring costs reduce what is left for dividends. Residential REITs deal with short leases and frequent turnover, which raises management costs and makes quarterly income more variable.
Whether the Payout Is Sustainable: FFO and AFFO
The legal minimum runs on taxable income, but taxable income is not a good measure of a real estate company’s cash. Accounting rules require property owners to record depreciation each year, even though commercial buildings often appreciate. Depreciation drags net income down on paper without touching the bank account.
The standard fix is Funds From Operations. As defined by Nareit, FFO starts with net income, adds back depreciation and amortization of real estate assets, removes gains or losses from property sales, and strips out impairment charges tied to declines in property value.4Nareit. Nareit Funds From Operations White Paper – 2018 Restatement FFO is the number analysts lead with when they discuss REIT earnings.
Adjusted Funds From Operations goes further by subtracting the recurring maintenance spending that keeps buildings functional, like roof replacements, parking lot repaving, and building system upgrades. Those costs are capitalized rather than expensed, so FFO ignores them, but the cash still leaves the company. Comparing the dividend to AFFO gives a more honest read on sustainability. A payout that consumes about 80 percent of AFFO leaves room for a bad quarter; one that runs above 100 percent of AFFO is being funded from somewhere other than operations.
How REIT Dividends Are Taxed in Your Hands
The high yields come with a tax structure that surprises some investors. Because the REIT already avoided corporate tax on the income it distributed, most of what you receive is taxed as ordinary income at your personal rate rather than at the lower qualified dividend rate that applies to most stock dividends. For 2026, the top federal ordinary rate stays at 37 percent after the One Big Beautiful Bill Act preserved the rate structure that was otherwise scheduled to expire.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One Big Beautiful Bill
That same legislation made the Section 199A deduction permanent, letting individuals deduct 20 percent of qualified REIT dividends before calculating tax. The effect is that the top federal rate on ordinary REIT dividends drops from 37 percent to roughly a 29.6 percent effective rate for top-bracket filers. High earners also owe the 3.8 percent net investment income surtax on top, so the maximum combined federal burden on ordinary REIT dividends lands near 33.4 percent.6Nareit. REIT Dividends and Taxes: What Investors Should Know
Not every dollar is treated the same way. A REIT distribution can arrive as three different things:
- Ordinary income, which is the bulk of most REIT payouts, taxed at your regular rate after the 199A deduction.
- Capital gain, when a REIT sells a property at a profit and passes the gain through. This is taxed at long-term capital gains rates, topping out at 20 percent plus the 3.8 percent surtax.6Nareit. REIT Dividends and Taxes: What Investors Should Know
- Return of capital, meaning the portion of a distribution that exceeds the REIT’s earnings and profits. It is not immediately taxable, but it reduces your cost basis and raises the capital gain you will owe when you sell.7Nareit. Tax Treatment of REIT Common Share Dividends Paid in 2024
Your REIT’s annual tax reporting breaks the payout down by category. Holding REITs inside an IRA or similar tax-advantaged account avoids the ordinary income problem entirely, which is why many advisors keep them there when they can.
When and How You Get Paid
Most REITs pay quarterly, though a growing number pay monthly to appeal to investors who use the income for living expenses. The board sets the schedule and can adjust or suspend the dividend if cash flow deteriorates, though cutting a payout is something management works hard to avoid because it typically hits the share price. Distributions land in your brokerage account as cash unless you have opted into a dividend reinvestment plan.
A reinvestment plan uses the cash payout to buy additional shares automatically, usually including fractional shares and often without a brokerage commission.8Charles Schwab. How a Dividend Reinvestment Plan Works The reinvested dividends are still taxable in the year they are declared, even though the cash never reached you, and each reinvestment creates a new tax lot to track for cost basis purposes.