What Are Section 199A Dividends and How Are They Taxed?

Section 199A dividends are the portion of a real estate investment trust’s ordinary dividend payments that qualifies for a 20 percent federal income tax deduction. If a REIT or a fund holding REITs pays you $10,000 that lands in this category, you generally deduct $2,000 and pay regular income tax on the remaining $8,000. The deduction was created by the Tax Cuts and Jobs Act of 2017 and made permanent by the One Big Beautiful Bill Act signed in 2025.¹

The tax code defines a qualified REIT dividend as any dividend from a REIT that is not a capital gain dividend and not qualified dividend income.² In plain terms, only the ordinary-income slice of a REIT distribution qualifies. That is the slice you would otherwise pay tax on at your regular bracket, and the 20 percent deduction is what makes it worth flagging separately.

Where to Find Them on Your 1099-DIV

Each January your brokerage or fund company sends a Form 1099-DIV covering the prior calendar year. The number you need is in Box 5, labeled “Section 199A dividends.”³ It is not extra income on top of what you already see. It is a subset of the total ordinary dividends in Box 1a, telling you how much of that Box 1a figure is eligible for the deduction.

Before filing, check that Box 5 is not larger than Box 1a. If you own REITs across multiple accounts, you may receive several 1099-DIVs; add the Box 5 amounts together for your total.

What Doesn’t Qualify

REIT payouts often bundle three different income types, and only one gets the Section 199A treatment.

Ordinary income shown in Box 5 is taxed at your regular rate but eligible for the 20 percent deduction.
Capital gain distributions are taxed at long-term capital gains rates, up to 20 percent for higher earners, and reported separately. They do not qualify for the Section 199A deduction because they already receive favorable treatment.
Return of capital is not taxed immediately. It reduces your cost basis in the shares, which increases the gain, or decreases the loss, you recognize when you sell.

The 1099-DIV and any supplemental statement from the REIT or fund will break the distribution down for you, so you don’t have to classify the payments yourself.

Holding Period You Have to Meet

To claim the deduction on a given dividend, you must have held the REIT or fund shares for at least 46 days during the 91-day window that begins 45 days before the ex-dividend date. The purchase day does not count toward the 46 days; the sale day does. Buy and sell REIT shares quickly around a dividend and you may collect the cash but lose the right to deduct it.

REITs and funds sometimes report dividends in Box 5 even when they cannot verify whether a particular shareholder met that holding period. The IRS instructions note that a REIT should include dividends in Box 5 when confirming the recipient’s holding period is impractical.⁴ The obligation to confirm you actually meet the requirement is yours.

Section 199A Dividends From Mutual Funds and ETFs

You do not need to own individual REIT shares to receive these dividends. Mutual funds and ETFs that hold REITs in their portfolios can pass qualifying dividends through to shareholders. These funds are organized as regulated investment companies, and the IRS allows them to report Section 199A dividends the same way a REIT would.⁴ The amount lands in Box 5 either way.

Calculating and Claiming the Deduction

The arithmetic is simple. Add the Box 5 amounts from all your 1099-DIVs and multiply by 20 percent. Section 199A dividends of $8,000 produce a starting deduction of $1,600. You report the calculation on Form 8995 (the simplified version) or Form 8995-A (the full version).⁵

For 2025 returns, you can use the simplified Form 8995 if your taxable income before the deduction is $394,600 or less for married filing jointly, or $197,300 or less for other filers.⁶ Above those thresholds, use Form 8995-A. The dollar limits adjust for inflation each year, so check the current instructions when you file. Unlike the qualified business income deduction for active business owners, the REIT dividend piece does not require any W-2 wage test or capital asset threshold. Box 5 and the right form are enough.

One overall cap applies. Your total Section 199A deduction, combining REIT dividends and any qualified business income from pass-through entities, cannot exceed 20 percent of your taxable income minus net capital gains.² For an investor whose only Section 199A income is REIT dividends, this cap rarely bites, because 20 percent of the dividends will almost always be less than 20 percent of total taxable income.

The deduction sits “below the line,” so it reduces taxable income rather than adjusted gross income. You can take it whether you claim the standard deduction or itemize.⁵

What You Actually Pay in Tax

Because the deduction knocks out a fifth of the income before your bracket applies, your effective rate on Section 199A dividends is 80 percent of whatever bracket you’re in. A taxpayer in the 24 percent bracket pays an effective 19.2 percent on these dividends. A taxpayer in the top 37 percent bracket pays an effective 29.6 percent, calculated as 37 percent on the 80 percent that remains after the deduction.¹

One boundary worth noting: the deduction applies only for income tax purposes. It does not reduce the 3.8 percent net investment income tax that applies to higher-income taxpayers. With the NIIT layered on, a top-bracket investor’s combined effective rate on Section 199A dividends is roughly 33.4 percent, compared with 40.8 percent on fully taxable ordinary income at the same bracket before the deduction.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One Big Beautiful Bill
2
Office of the Law Revision Counsel. 26 USC 199A – Qualified Business Income
3
Internal Revenue Service. Form 1099-DIV (Rev. January 2024) Dividends and Distributions
4
Internal Revenue Service. Instructions for Form 1099-DIV (01/2024)
5
Internal Revenue Service. Qualified Business Income Deduction
6
Internal Revenue Service. Instructions for Form 8995 (2025)