How Private REIT Dividends Are Taxed

REIT income looks like a dividend, but it doesn't tax like the dividend from a typical stock. Because a REIT pays little or no corporate tax and passes most of its income through to investors, the tax burden lands on you — and a single REIT distribution can arrive in three different tax flavors, each treated differently on your return. For private and non-traded REIT investors especially, understanding how these distributions are taxed is essential to judging the real, after-tax value of the yield. This memo breaks it down. It's general information, not tax advice; your CPA should handle the specifics.

Why REIT dividends are taxed differently

A normal corporation pays tax on its profits, and then shareholders pay a second, lower "qualified dividend" tax on what's distributed. A REIT is built to avoid that double taxation: if it distributes at least 90% of its taxable income, it generally pays no corporate-level tax, and the income flows through to investors largely untaxed at the entity level. The trade-off is that most REIT dividends don't get the favorable qualified-dividend rate — because the income was never taxed at the company, it's generally taxed to you as ordinary income at your regular rate. This single structural fact explains most of what follows, and it applies to REITs of every type, as our REIT guide describes.

The three components of a REIT distribution

A REIT distribution can be a blend of up to three tax characters, and your year-end statement breaks them out:

• Ordinary income dividends — the largest piece for most REITs, taxed at your ordinary rate (with the 199A deduction below).
• Capital gain distributions — your share of gains the REIT realized selling property, taxed at long-term capital gains rates.
• Return of capital — a portion that isn't currently taxed but reduces your cost basis.

Two REITs paying the same headline yield can leave you with quite different after-tax income depending on this mix, which is why the components matter as much as the rate.

Ordinary income and the Section 199A deduction

There's a meaningful break on the ordinary-income portion. Under Section 199A, individuals can generally deduct 20% of "qualified REIT dividends," which lowers the effective tax rate on that income below your top ordinary rate. For a high-bracket investor, that deduction materially improves the after-tax yield of a REIT compared with, say, taxable bond interest taxed in full. This deduction was scheduled to expire after 2025 under the original 2017 law, but the 2025 One Big Beautiful Bill Act addressed its continuation — confirm the current treatment with your CPA, since this is exactly the kind of provision that shifts with legislation.

Return of capital and basis

The most misunderstood component is return of capital (ROC). When a distribution exceeds the REIT's taxable income — often because depreciation shelters its earnings — the excess is treated as a return of your own capital rather than income. It isn't taxed in the year received; instead it reduces your cost basis in the shares. That's genuinely favorable in the near term (tax-deferred cash flow), but it's deferral, not elimination: a lower basis means a larger taxable gain when you eventually sell, and if your basis reaches zero, further ROC is taxed as capital gain. ROC can make a yield look better than it is on an after-tax, whole-life basis, so read it carefully — the same caution applies to private REIT distributions generally.

Capital gain distributions

When a REIT sells a property at a profit, it can pass that gain to you as a capital gain distribution, taxed at long-term capital gains rates rather than ordinary rates — generally more favorable than the ordinary-dividend portion. These tend to be lumpier and less predictable than the regular income dividend, appearing in years the REIT transacts. They're a reminder that a REIT's tax profile reflects what's happening inside the portfolio, not just a steady coupon.

How it's reported (and private vs. public)

REITs report your distributions and their components on Form 1099-DIV (private REITs issue the same form), which separates ordinary dividends, qualified dividends (usually a small or zero amount for REITs), capital gain distributions, and nondividend distributions (return of capital). Importantly, the type of REIT — public, non-traded, or private — generally doesn't change how the dividends are taxed; the federal rules are the same. What differs across types is liquidity and valuation, not dividend taxation. Hand the 1099-DIV to your preparer and make sure the 199A deduction and basis adjustments for ROC are captured.

Judging yield on an after-tax basis

The practical upshot: a REIT's headline yield is a pre-tax number, and its real value to you depends on the component mix and your bracket. Ordinary-income dividends (less the 199A deduction), capital gain distributions, and return of capital each carry different tax, so two REITs with identical yields can deliver different take-home income. When comparing a REIT against other income investments — or comparing private, non-traded, and public REITs against each other — translate to an after-tax basis. As always, this is general information; your CPA should model your specific situation before you rely on it.

Frequently Asked Questions

Glossary

Ordinary Income Dividend

The portion of a REIT distribution taxed at ordinary rates, eligible for the 199A deduction.

Section 199A Deduction

A deduction of up to 20% of qualified REIT dividends, lowering the effective tax rate.

Return of Capital

A nontaxable distribution that reduces basis, deferring tax until sale.

Capital Gain Distribution

A REIT's pass-through of realized property gains, taxed at long-term capital gains rates.

Disclosures