You make money with REITs two ways: the required cash dividends they pay out every quarter, and the appreciation of the shares themselves as property values and rents rise. Publicly traded equity REITs yielded roughly 3.98% on average in early 2026, compared to about 1.09% for the S&P 500.1Nareit. REIT Industry Financial Snapshot Turning that yield into real after-tax return depends on which kind of REIT you buy, how you hold it, and how the IRS treats the distributions when they land in your account.
Why REITs Pay So Much
Federal law requires a REIT to distribute at least 90% of its taxable income to shareholders every year. That rule sits in Internal Revenue Code Section 857, and it effectively pushes almost all of the company’s earnings out the door as dividends rather than letting them build up inside the trust.2Office of the Law Revision Counsel. 26 USC 857 – Taxation of Real Estate Investment Trusts and Their Beneficiaries The cash comes from rent on commercial properties or interest on real estate loans, depending on the type of REIT.
The second income stream is share price growth. When property values rise, rents increase, or a trust sells a building at a profit, the underlying portfolio becomes more valuable and the shares tend to follow. Sale gains flow through as capital gain distributions rather than sitting on the balance sheet. Combined, the high current income and steadier price growth are what make REITs a long-hold instrument rather than a trading vehicle.
Equity REITs vs. Mortgage REITs
The single biggest decision affecting your returns is which type of REIT you buy. Equity REITs own physical properties — apartment complexes, warehouses, hospitals, shopping centers — and collect rent under lease agreements. Their dividends have historically been relatively stable.
Mortgage REITs don’t own buildings. They lend money for real estate or hold mortgage-backed securities, earning the spread between what they collect on those loans and what they pay to borrow. That model looks tempting because headline yields tend to be higher, but the risks are meaningfully different:
- Mortgage REITs typically borrow 55% to 85% of the fair market value of their assets, versus 25% to 50% for equity REITs.
- Because many borrow short and lend long, rising rates can compress their margins quickly.
- Dividend cuts have been common across the sector, including widespread reductions in 2020.
- Retaining little cash for growth, they frequently issue new shares, diluting existing holders.
Over a 15-year period covering two full economic cycles, mortgage REITs returned only about 4.4% annually, well behind equity REITs. If a REIT is paying a yield that seems noticeably higher than the market, check whether it’s a mortgage REIT before you buy.
How to Buy REIT Shares
The straightforward path is opening an account with any online brokerage, searching for the ticker, and placing a buy order the same way you would for any stock. For instant diversification across dozens or hundreds of REITs, REIT-focused exchange-traded funds and mutual funds package the exposure in a single purchase.
Some REITs offer Direct Stock Purchase Plans that let you buy shares directly from the company’s transfer agent, often with a small initial purchase and optional automatic monthly investments. A Dividend Reinvestment Plan (DRIP) automatically uses your dividend payments to buy additional shares, often fractional, with no trading commission. Over time, a DRIP compounds your position quietly, which matters more if you don’t need the income now.
Traded, Non-Traded, and Private REITs
The way a REIT is sold affects how much of your money reaches actual real estate and how easily you can get out.
Publicly traded REITs list on major exchanges and file 10-Ks, 10-Qs, and other public disclosures with the SEC.3SEC.gov. Investor Bulletin – Real Estate Investment Trusts (REITs) You can buy and sell any time the market is open at transparent prices, and transaction costs are usually just your brokerage’s standard commission, if any.
Public non-traded REITs file the same SEC disclosures but their shares don’t trade on any exchange. Getting out before a liquidity event depends on the sponsor’s share redemption program, which typically caps buybacks around 5% of outstanding shares per quarter; exceeding 20% annually could threaten the REIT’s tax status.3SEC.gov. Investor Bulletin – Real Estate Investment Trusts (REITs) The bigger drag is upfront fees, which commonly run 10% to 15% of your investment. A $100,000 purchase might put only $85,000 to $90,000 to work in actual property.4U.S. Securities and Exchange Commission. Investor Bulletin – Non-traded REITs
Private REITs are exempt from SEC registration and are generally limited to accredited investors: net worth above $1 million excluding your primary residence, or annual income above $200,000 ($300,000 with a spouse) for at least the prior two years.5U.S. Securities and Exchange Commission. Accredited Investors You’ll see far less financial disclosure, and exit opportunities before a liquidity event are essentially nonexistent.
Reading a REIT Before You Buy
Standard earnings numbers don’t work well for real estate companies. Net income includes depreciation charges that understate the cash a building actually generates, because well-maintained property tends to hold or increase in value rather than wear out.
Funds From Operations (FFO) fixes this by starting with net income, adding back real estate depreciation and amortization, and stripping out gains or losses from property sales. Adjusted Funds From Operations (AFFO) refines it further by subtracting recurring capital expenditures like roof replacements and parking lot repairs and adjusting for rent that’s been billed but not paid. AFFO is the clearest read on how much the REIT can sustainably distribute. Divide total dividends by AFFO to get the payout ratio; the closer it is to 100%, the less cushion the REIT has if income drops.
Two more numbers matter for income stability. The occupancy rate is the share of leasable space actually generating rent. The weighted average lease term (WALT) measures how long, on average, current leases have left, weighted by each tenant’s rent contribution. A high WALT means the rent roll is locked in for years; a low WALT means many leases will roll soon, creating both turnover risk and possible upside if market rents have risen. All of these figures show up in the annual 10-K, searchable through the SEC’s EDGAR system.6U.S. Securities and Exchange Commission. How to Read a 10-K/10-Q
For non-traded REITs, where there’s no market price, Net Asset Value (NAV) does the work: the estimated market value of the properties minus total liabilities, expressed per share. Comparing NAV per share to the offering price tells you whether you’re paying a premium or a discount for the real estate underneath.
How REIT Dividends Are Taxed
REIT dividends do not get the qualified-dividend treatment that most corporate dividends receive. This surprises a lot of new investors at tax time. Your Form 1099-DIV splits each year’s distributions into categories, and each one is taxed differently.7Internal Revenue Service. Form 1099-DIV – Dividends and Distributions
The largest portion, about 78% of REIT distributions on a market-cap-weighted basis in 2024, is classified as ordinary income.1Nareit. REIT Industry Financial Snapshot That share is taxed at your regular marginal rate, which currently tops out at 37%, and it does not qualify for the lower rates that apply to most corporate dividends.8Internal Revenue Service. Topic No. 404 – Dividends and Other Corporate Distributions
When a REIT sells a property at a profit, it passes the gain through as a capital gain distribution. About 9% of REIT dividends fell into this category in 2024. These are taxed at long-term capital gains rates, capped at 20% for high earners, though a portion may be classified as unrecaptured Section 1250 gain and taxed at up to 25%. The subcategories appear in Boxes 2a through 2d of the 1099-DIV.7Internal Revenue Service. Form 1099-DIV – Dividends and Distributions
Return of capital made up about 12% of distributions in 2024. It isn’t taxed immediately; instead it reduces your cost basis in the shares. The tax is deferred, not eliminated. When you sell, the lower basis produces a larger taxable gain. If basis reaches zero, further return-of-capital distributions are taxed as capital gain right away.7Internal Revenue Service. Form 1099-DIV – Dividends and Distributions
On top of all that, higher earners owe an additional 3.8% net investment income tax on REIT dividends of every category. It applies once modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly, and those thresholds are not indexed for inflation.9Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
The Section 199A Deduction
Section 199A lets you deduct a percentage of ordinary REIT dividends before calculating tax. The Tax Cuts and Jobs Act originally set the deduction at 20% and scheduled it to expire after 2025.10Internal Revenue Service. Qualified Business Income Deduction The One Big Beautiful Bill Act made the deduction permanent starting in 2026 and raised it to 23%.
So on $10,000 of ordinary REIT dividends, you deduct $2,300 first and pay tax on $7,700. The deduction is capped at the lesser of your combined qualified REIT dividends plus qualified business income, or 20% of your taxable income minus net capital gains. Unlike other pieces of the 199A deduction, the REIT component isn’t subject to wage or property limitations, so it’s available at any income level. The qualifying amount shows up in Box 5 of your 1099-DIV.7Internal Revenue Service. Form 1099-DIV – Dividends and Distributions
Hold REITs in Retirement Accounts When You Can
Because most of a REIT’s distribution is taxed as ordinary income, holding shares in a traditional IRA or 401(k) removes the tax drag entirely while the account is still growing. Distributions arrive tax-free inside the account, compound untouched, and get taxed as ordinary income only when you withdraw in retirement.
A Roth IRA or Roth 401(k) goes further. Qualified withdrawals are tax-free, so the highest-taxed portion of a taxable REIT position becomes the lowest-taxed portion in a Roth. Inside any retirement account, the distinctions between ordinary dividends, capital gain distributions, and return of capital vanish, and the Section 199A deduction becomes irrelevant because there’s no tax to reduce. For investors in higher brackets who don’t need current cash flow from their REITs, sheltering them in a retirement account is one of the simplest moves to improve after-tax returns.
Interest Rate and Sector Risk
REITs move with interest rates more than most stocks. When rates rise, borrowing costs climb and higher capitalization rates tend to push property values down; when rates fall, both effects reverse. Cap rates across core sectors have expanded by roughly 190 basis points from recent peak valuations, with office hit hardest.
Leverage magnifies both directions. As of early 2024 the broad REIT market carried net debt of about 5.6 times EBITDA, with leverage around 33% of total market capitalization, and interest coverage sat near 4.5 times. That’s a reasonable buffer, not an unlimited one, and rising rates can compress earnings quickly.
Sector concentration is its own risk. An office-focused REIT faces very different economics than an industrial-warehouse or cell-tower REIT. The pandemic hollowed out office demand while accelerating logistics demand. If you’re picking individual REITs instead of a diversified fund, you’re making a bet on a specific property type, not on real estate in general.
721 Exchanges for Existing Property Owners
If you already own commercial real estate, a Section 721 exchange (also called an UPREIT transaction) lets you convert that property into REIT ownership without triggering an immediate capital gains bill. You contribute the property to a REIT’s operating partnership and receive operating partnership (OP) units in return. Those units represent equity in the partnership that holds the REIT’s properties, and they typically pay distributions equivalent to the REIT’s dividends.
Tax on the built-in gain is deferred until you convert the OP units into publicly traded REIT shares or sell them. Investors who hold the units until death pass them to heirs at a stepped-up cost basis, which can eliminate the deferred tax entirely.
Owners of smaller properties that don’t meet a REIT’s institutional threshold can take a two-step path: sell the property, use a 1031 exchange to reinvest in a Delaware Statutory Trust designed for eventual REIT conversion, and then let the DST’s assets be contributed to a REIT through a 721 exchange when the sponsor completes its investment cycle. Your DST interest converts to OP units at that point. The path adds complexity, holding-period requirements, and sponsor-specific terms, but it opens the UPREIT strategy to a much wider range of property owners.