Tax Facts

7976 / How is income earned by a REIT taxed?

An important aspect of REITs is their pass-through income tax treatment. Like partnerships, REITs are not taxed at the entity level, but at the shareholder level. Thus, annual taxable income is allocated pro-rata to all shareholders, and these amounts are included in the shareholders’ individual returns and will be taxed at their level.


The amount of income determined at the entity level and passed through to REIT shareholders is usually less than the actual cash distributions received for the same year. In most instances this is due to the fact that taxable income is reduced by depreciation, a deductible expense that does not reduce distributable cash flow. Since REIT distributions differ from REIT income allocations, and the information reported to shareholders on a Form 1099, this can cause confusion that, in some cases, may cause investors to avoid investing in REITs. See Q 7977 and Q 7980 for a discussion of how REIT shareholders are taxed.



Planning Point: Shareholders use Form 1120-REIT (U.S. Income Tax Return for Real Estate Investment Trusts) to report the income, gains, losses, deductions, credits and to figure the income tax liability of real estate investment trusts.




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