Talk to an Advisor

What Are The Tax Implications Of Investing In REITs?

REITs, or real estate investment trusts, are a type of investment that owns and operates real estate properties. They are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends, which makes them an attractive investment for income-oriented investors. However, there are some tax implications of investing in REITs that investors should be aware of:

  1. Dividend taxation: REITs pay dividends to their shareholders, and these dividends are generally taxed at the investor’s ordinary income tax rate. However, a portion of the REIT dividend may be considered a return of capital, which is not immediately taxable.
  2. Qualified dividend status: If a REIT meets certain criteria, its dividends may be considered “qualified dividends” and taxed at a lower rate than ordinary income. To be considered qualified, the investor must hold the REIT shares for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
  3. Capital gains: REITs also generate capital gains or losses when their underlying properties are sold. These gains or losses are passed through to shareholders and are taxed as long-term or short-term capital gains, depending on how long the shares have been held.
  4. State taxes: Some states also tax REIT dividends differently from federal taxes. Investors should consult with their tax advisors to determine the tax treatment of REITs in their state.
  5. Unrelated Business Taxable Income (UBTI): If an investor holds REIT shares in a tax-deferred account such as an IRA or 401(k), the dividends may be subject to Unrelated Business Taxable Income (UBTI) if the REIT generates income from non-real estate activities such as selling goods or services. UBTI is taxed at the trust tax rate, which is typically higher than the individual tax rate.

It’s important to note that tax laws and regulations are subject to change, and investors should consult with a tax professional to determine the specific tax implications of investing in REITs.