How are REIT dividends taxed?

Mostly as ordinary income rather than at the lower qualified-dividend rates, because REITs pay no corporate tax themselves. A portion may be return of capital (tax-deferred) or capital gain, and the qualified business income deduction currently lets investors deduct 20% of ordinary REIT dividends. Many investors hold REITs in IRAs and 401(k)s where the dividend tax treatment stops mattering.

What is the difference between a REIT and a real estate fund?

A REIT is a specific tax structure with mandatory 90% payout and real-estate income requirements, and public REITs trade like stocks with daily liquidity. Real estate funds (private equity funds, interval funds, non-traded REITs) pool capital under different structures, usually with lock-ups, higher minimums, and returns weighted toward appreciation at exit rather than current dividends. Liquidity and fee structures, not the underlying buildings, are the biggest practical differences.

Are REITs better than owning rental property?

They answer different needs. REITs win on liquidity, diversification, and zero effort; direct ownership wins on leverage, depreciation deductions, 1031 exchanges, and control. Total long-run returns are comparable in many studies, the choice hinges on whether you want real estate as a hands-off portfolio allocation (REITs) or as an active wealth-building business (rentals), with fractional platforms occupying the middle ground.

Real Estate Investing Glossary

REIT (Real Estate Investment Trust)

Last reviewed 2026-07-15

A REIT is a company that owns income-producing real estate and must pay out at least 90% of taxable income to shareholders as dividends.

What is a REIT?

A real estate investment trust (REIT) is a company that owns or finances income-producing real estate, apartments, warehouses, data centers, offices, cell towers, and lets investors buy shares in the portfolio. To keep its special tax status (no corporate income tax), a REIT must distribute at least 90% of taxable income to shareholders annually, derive most of its income from real estate, and meet ownership-diversity rules.

Publicly traded REITs combine real estate exposure with stock-market convenience: buy or sell in seconds, start with the price of one share, and get professional management and diversification across hundreds of properties. The trade-offs are stock-like volatility (public REITs often fall with the equity market even when property values are stable), no leverage or tax control for the individual investor, and dividends taxed mostly as ordinary income, softened by the 20% qualified business income deduction while it applies.

REITs are one point on a spectrum of passive real estate options. Compared with direct ownership, they sacrifice depreciation benefits, 1031 eligibility, and leverage control for total liquidity and zero effort. Fractional ownership platforms sit between the two, offering deeded exposure to individual properties at low minimums, with more property-level transparency than a blind pool of thousands of assets.

Frequently asked questions

How are REIT dividends taxed?: Mostly as ordinary income rather than at the lower qualified-dividend rates, because REITs pay no corporate tax themselves. A portion may be return of capital (tax-deferred) or capital gain, and the qualified business income deduction currently lets investors deduct 20% of ordinary REIT dividends. Many investors hold REITs in IRAs and 401(k)s where the dividend tax treatment stops mattering.
What is the difference between a REIT and a real estate fund?: A REIT is a specific tax structure with mandatory 90% payout and real-estate income requirements, and public REITs trade like stocks with daily liquidity. Real estate funds (private equity funds, interval funds, non-traded REITs) pool capital under different structures, usually with lock-ups, higher minimums, and returns weighted toward appreciation at exit rather than current dividends. Liquidity and fee structures, not the underlying buildings, are the biggest practical differences.
Are REITs better than owning rental property?: They answer different needs. REITs win on liquidity, diversification, and zero effort; direct ownership wins on leverage, depreciation deductions, 1031 exchanges, and control. Total long-run returns are comparable in many studies, the choice hinges on whether you want real estate as a hands-off portfolio allocation (REITs) or as an active wealth-building business (rentals), with fractional platforms occupying the middle ground.

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