The CPA's 2026 Guide to Private & Non-Traded REITs

REITs land on a CPA's desk mostly at the reporting stage, and their distributions are deceptively complex: a single 1099-DIV can carry four or five tax characters, each treated differently, and the §199A deduction adds a favorable twist many clients don't realize they're getting. This guide covers REIT taxation from the investor's side — the dividend components, the 199A deduction, basis effects of return of capital, the UBTI considerations for retirement accounts, and why REIT shares can't complete a 1031. It pairs with our client-facing REITs guide.

REIT taxation in brief (advisor's refresher)

A REIT that meets the income, asset, and distribution tests (notably distributing ≥90% of taxable income) is generally not taxed at the entity level; income is taxed to shareholders as distributed. For your clients, the type of REIT — publicly traded, non-traded, or private — affects liquidity and valuation but not the federal taxation of the dividends, which follows the same rules across types. Your work is principally at reporting: correctly characterizing the components of each distribution and applying the §199A deduction. Private REITs add an accredited-investor gate and Reg D considerations, covered in our REITs guide.

The 1099-DIV components

A REIT distribution is reported on Form 1099-DIV and can blend several characters: ordinary dividends (Box 1a), of which only a small amount is usually qualified (Box 1b); total capital-gain distributions (Box 2a) from the REIT's property sales; unrecaptured §1250 gain (Box 2b) taxed at up to 25%; §199A dividends (Box 5), the portion eligible for the 20% deduction; and nondividend distributions (Box 3), i.e., return of capital. Each flows to a different place on the return, so two REITs with identical headline yields can produce materially different after-tax results. Reconcile the 1099-DIV components rather than treating the distribution as a single number.

The §199A 20% deduction

A genuine advantage for REIT investors: the ordinary-income portion reported as qualified REIT dividends (Box 5) is eligible for the 20% §199A deduction, claimed on Form 8995 or 8995-A. Importantly, the REIT-dividend component of 199A is not subject to the W-2/UBIA limitations or the taxable-income thresholds that constrain ordinary QBI — so high-income clients get the full 20% on REIT dividends regardless. This effectively lowers the top rate on that income. The 199A deduction was scheduled to expire after 2025 but was addressed (and made permanent) by the 2025 tax law; confirm current treatment when you prepare the return.

Return of capital and basis

Nondividend distributions (Box 3) are a return of capital: not taxed currently, they reduce the shareholder's basis and are common for REITs because depreciation shelters their earnings. Track basis carefully across years — when basis reaches zero, further return of capital is taxed as capital gain, and the reduced basis increases gain on an eventual sale. ROC is therefore a deferral, not free money, and it inflates the apparent yield. Capital-gain distributions (Box 2a) are long-term regardless of holding period, with the §1250 portion (Box 2b) taxed at up to 25%. These basis and character effects are the substance of REIT tax work.

UBTI and retirement accounts

A point that matters for clients investing through IRAs or tax-exempt entities: REITs act as a UBTI blocker. Because the REIT is a corporation for tax purposes, its dividends are generally not unrelated business taxable income to a tax-exempt or IRA investor — even though the REIT itself may use leverage. Contrast that with a direct interest in a leveraged operating partnership (or many syndications), which can pass through UBTI/UDFI and trigger Form 990-T filing and tax inside the IRA. So for retirement-account clients seeking real estate exposure, a REIT (including a private REIT) is frequently the cleaner vehicle than a partnership — a useful planning insight when comparing a REIT to a syndication.

1031 ineligibility and the 721 path

Flag this for clients tempted to roll real-estate sale proceeds into a REIT: REIT shares are securities, not like-kind real property, and cannot be §1031 replacement property — of any type, public or private. A client wanting to reach a REIT with continued deferral must use the two-step path: 1031 into a DST, then a 721 exchange into the REIT's operating partnership for OP units (a partnership interest, K-1 reporting). Selling REIT shares is a taxable event like any stock. Confusing REITs with 1031-eligible vehicles is a common client error worth correcting early.

Client due-diligence checklist

• Reconcile the 1099-DIV components — ordinary, qualified, capital-gain (and §1250), §199A, and return of capital.
• Claim the §199A deduction on Box 5 qualified REIT dividends (Form 8995/8995-A).
• Track basis for return-of-capital distributions across years.
• For IRA/tax-exempt clients, confirm the REIT structure avoids UBTI versus a partnership alternative.
• Correct any 1031 misconception — REIT shares aren't eligible; use the DST-then-721 path.
• For private REITs, verify accredited status and review the PPM, redemption terms, and fees.

What clients should know

Clients should know that REIT income is mostly ordinary (with the helpful 199A discount), that part of a distribution may be return of capital that lowers basis and isn't true yield, and that the type of REIT changes liquidity and valuation but not dividend taxation. IRA investors should appreciate the UBTI advantage over partnerships. And anyone selling real estate should understand REIT shares can't take a 1031 directly. For private and non-traded REITs specifically, reinforce the illiquidity and redemption constraints alongside the tax picture.

Frequently Asked Questions

Glossary

Form 1099-DIV

The form reporting REIT distribution components — ordinary, qualified, capital-gain, §1250, §199A, and return of capital.

§199A REIT Dividends

The portion of REIT dividends (Box 5) eligible for the 20% deduction without QBI limits.

Return of Capital

A nondividend distribution (Box 3) that reduces basis rather than being taxed currently.

UBTI Blocker

A REIT's ability to shield IRA/tax-exempt investors from unrelated business taxable income.

Disclosures