Two federal changes reshape how self-storage REIT investors are taxed starting with the 2026 tax year. The One Big Beautiful Bill Act made the Section 199A deduction for qualified REIT dividends permanent and raised it from 20% to 23%, and it restored 100% first-year bonus depreciation for qualifying property placed in service after January 19, 2025.1Internal Revenue Service. One, Big, Beautiful Bill Provisions For shareholders, the first change lowers the effective federal rate on ordinary REIT distributions. The second changes the mix of what shows up on your 1099-DIV, generally pushing more of each payout into the return-of-capital bucket that isn’t taxed until you sell.
The 23% Section 199A Deduction Is Now Permanent
Most of what a self-storage REIT pays out is ordinary dividend income, not qualified dividends, so without any offset the top federal rate of 37% would apply to high earners.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Section 199A of the Internal Revenue Code softens that by letting individual taxpayers deduct a percentage of their qualified REIT dividends before figuring tax.3Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income
Under the 2017 Tax Cuts and Jobs Act, the deduction was 20% and set to expire after December 31, 2025.4Internal Revenue Service. Qualified Business Income Deduction The One Big Beautiful Bill Act made it permanent and lifted the rate for qualified REIT dividends (and publicly traded partnership income) to 23% for taxable years beginning after December 31, 2025.1Internal Revenue Service. One, Big, Beautiful Bill Provisions
The math is straightforward. A top-bracket shareholder receiving $10,000 in ordinary REIT dividends can deduct $2,300 and owe federal income tax on $7,700. That drops the effective top federal rate on those dividends from 29.6% under the old 20% deduction to roughly 28.5%. The REIT piece of 199A is simpler than the general qualified business income deduction: shareholders do not need to meet wage or property-basis thresholds. The eligible amount is reported in Box 5 of your Form 1099-DIV, and you claim the deduction on your return whether or not you itemize.5Internal Revenue Service. Form 1099-DIV – Dividends and Distributions
100% Bonus Depreciation Is Back
The other change is at the REIT level, but you feel it in the composition of your distributions. The Tax Cuts and Jobs Act originally let businesses deduct 100% of the cost of qualifying property in year one. That benefit was phasing down toward zero: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026. The One Big Beautiful Bill Act scrapped the phase-down. For most qualifying business property placed in service after January 19, 2025, the full cost is deductible in the first year again.1Internal Revenue Service. One, Big, Beautiful Bill Provisions
Storage buildings themselves are nonresidential real property with a 39-year recovery period and don’t qualify.6Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System But many components inside a facility do. Self-storage operators routinely commission cost segregation studies to pull out items like security cameras, climate-control equipment, electronic gate systems, and interior partition walls, reclassifying them into five-, seven-, or fifteen-year categories. Those pieces can now be fully expensed up front again.
For you, the follow-through is this: larger depreciation deductions reduce the REIT’s taxable income, so a bigger share of each distribution gets classified as return of capital rather than ordinary income. Your current-year tax bill goes down. Your cost basis drops by the return-of-capital amount, which means a larger taxable gain whenever you eventually sell the shares. During the phase-down years of 2023 and 2024, self-storage REITs were reporting steadily higher portions of taxable ordinary income. The restoration reverses that direction for new property.
What Each Piece of Your 1099-DIV Looks Like Now
A single distribution from a self-storage REIT can hit your return in three different ways, and the two changes above affect each one differently.
- Ordinary dividends are the largest slice for most self-storage REITs, taxed at your regular income rate and now offset by the 23% Section 199A deduction. The permanence matters as much as the rate bump: you can plan around it without a 2025 cliff.
- Capital gain distributions arise when the REIT sells a property at a profit and passes the gain through. These are taxed at long-term capital gains rates of 0%, 15%, or 20% depending on your taxable income. For 2026, the 20% rate applies above $545,500 for single filers and $613,700 for married couples filing jointly.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- Return of capital is the portion of a distribution that exceeds the REIT’s earnings and profits. You owe no tax on this amount in the year received, but it reduces your cost basis. That basis reduction becomes a larger taxable gain when you sell. It is deferred tax, not tax-free income.
Self-storage REITs already tend to generate meaningful return-of-capital distributions because depreciation is large relative to storage-unit cash flow. Restored bonus depreciation amplifies that pattern for facilities and improvements placed in service after the January 19, 2025 cutoff. For a long-term holder, the deferral is a benefit. For anyone planning to sell in the near term, the basis erosion is the other side of the ledger, and you need to be tracking your adjusted basis every year or you’ll misreport the gain.
The 3.8% Net Investment Income Tax Still Applies
Nothing in the new law touched the surtax under Section 1411 of the Internal Revenue Code. High-income investors still owe an additional 3.8% on net investment income, and that reaches every category of self-storage REIT distribution: ordinary dividends, capital gain distributions, and gains from selling the shares. It kicks in once modified adjusted gross income exceeds $200,000 for single filers, $250,000 for married couples filing jointly, or $125,000 for married filing separately.8Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
Those thresholds have never been indexed for inflation. They’ve held at the same dollar figures since the tax took effect in 2013, so more shareholders cross them each year even without a raise. For a top-bracket investor, the combined federal tax on ordinary REIT dividends after the 199A deduction works out to roughly 32.3%: 28.5% income tax plus 3.8% NIIT. Without the 199A deduction that same shareholder would face about 40.8%, which is why making the deduction permanent mattered as much as raising the rate.
Where to Hold Self-Storage REIT Shares
Because ordinary REIT dividends are still taxed at higher rates than qualified dividends from most stocks, even after the 23% deduction, holding self-storage REIT shares inside a traditional IRA or Roth IRA remains an effective location choice. Inside a traditional IRA, distributions compound without triggering annual tax. Inside a Roth, they aren’t taxed at all if you meet the withdrawal rules.
Investors sometimes worry about unrelated business taxable income when holding real estate in a retirement account, since that can produce a tax bill even inside an otherwise tax-exempt account. REIT dividends generally don’t create the problem. The REIT is a separate corporate-level entity paying out dividends, so those dividends count as investment income rather than income from an active trade or business, even when the trust uses significant leverage. Selling the shares inside a retirement account similarly avoids the issue in most cases. That makes REITs one of the cleaner ways to get real estate exposure inside a tax-advantaged wrapper.
State Taxes Don’t Always Follow the Federal Changes
State conformity is the piece most likely to trip you up. Many states use rolling conformity and automatically adopt federal Internal Revenue Code changes as they happen, so the permanent 23% Section 199A deduction and restored bonus depreciation flow through to your state return without extra work. Other states decouple. Several have historically refused to recognize Section 199A for state purposes, meaning you’d pay state tax on the full dividend even while claiming the federal deduction. The same decoupling can apply to bonus depreciation, producing a mismatch between federal and state taxable income that has to be tracked separately. Conformity rules change every legislative session, so check your state’s current position before you file.