What are the tax advantages of a REIT?

Compliant REITs are not required to pay corporate taxes. The REIT shareholders remit tax on ordinary and capital gain dividend income at their respective tax rates. REIT investors can deduct up to 20% of ordinary dividends before income tax is assessed.

Why are REITs not tax efficient?

REIT dividends can be complex There’s a downside to being a pass-through entity. REIT dividends generally don’t receive the same favorable tax rates that most dividends do. Most dividends are “qualified dividends,” so recipients pay the same lower tax rates that apply to long-term capital gains.

Are REIT funds tax efficient?

REITs offer incredible tax advantages. Since REITs are required to distribute 90% of their annual taxable income to investors, REITs are allowed to avoid taxation at the fund level. Because of this, investors avoid double taxation and the maximum amount of capital is returned as investment income.

How tax-efficient are REITs? REITs offer incredible tax advantages. Since REITs are required to distribute 90% of their annual taxable income to investors, REITs are allowed to avoid taxation at the fund level.

How are REITs treated for tax purposes?

The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.

How are REIT distributions taxed in the US?

The Taxation of REIT Distributions. REITs invest in real estate (and mortgages, in some instances) and make distributions to unit holders. A unit holder faces a slate of three possible tax treatments on these distributions: (1) ordinary income, (2) long-term capital gains, and (3) return of capital (“ROC”).

How are REIT dividends paid out to shareholders?

In return for the corporate tax benefits, REITs must pay out 90% of their taxable income to shareholders in the form of dividends. While the REIT tax code simplifies things from a corporate perspective, this is where it gets confusing for shareholders.

Why are REITs inefficient at the state level?

Because REIT distributions (1) tend to be taxed predominantly at ordinary income levels and because (2) REITs must distribute the vast majority of their taxable income to maintain their REIT status, REITs are quite inefficient from a tax standpoint. REITs can become even more tax inefficient at the state level.

What happens to your adjusted basis when you sell a REIT?

Specifically, the ROC portion reduces your adjusted basis in the REIT. As a result of the reduced basis, you will realize a larger capital gain when you sell the REIT (assuming you sell it for a gain). For example, suppose you bought Federal Realty Investment Trust (FRT) for $100.