7977 / How is a shareholder (or beneficiary) in a real estate investment trust taxed?
Ordinary income dividends. Under JGTRRA 2003, qualified dividend income is treated like net capital gain for most purposes (see Q 702) and is, therefore, eligible for the 20 percent/15 percent/0 percent tax rates instead of the higher ordinary income tax rates. ATRA made these tax rates permanent for tax years beginning after 2012. Because REITs generally do not pay corporate income taxes, most ordinary income dividends paid by REITs do not constitute qualified dividend income, and, consequently, are not eligible for the 20 percent/15 percent/0 percent rates.2 However, a small portion of dividends paid by REITs may constitute qualified dividend income—for example, if the: (1) dividend is attributable to dividends received by the REIT from non-REIT corporations, such as taxable REIT subsidiaries; or (2) income was subject to tax by the REIT at the corporate level, such as built-in gains, or when a REIT distributes less than 100 percent of its taxable income.
REITs that pass through dividend income to their shareholders must meet the holding period test (see Q 702) in order for the dividend-paying stocks that they pay out to be reported as qualified dividends on Form 1099-DIV. Investors must also meet the holding period test relative to the shares they hold directly, from which they received the qualified dividends that were reported to them.3
Unless designated by the REIT as qualified dividend income, all distributions are ordinary income dividends.4 Ordinary income dividends are included in the shareholder’s (or beneficiary’s) income for the taxable year in which they are received. Shareholders do not include a share of a REIT’s investment expenses in income, nor with the shareholder’s miscellaneous itemized deductions, as is the case with certain other pass-through entities. See Q 733.