How can I avoid paying tax on REITs?

The best way to avoid paying taxes on your REITs is to hold them in tax-advantaged retirement accounts, including traditional or Roth IRAs, SIMPLE IRAs, SEP-IRAs, or another tax-deferred or after-tax retirement accounts.

How are real estate investment trusts REITs taxed?

Where a company has invested in a REIT, any property income distribution (PID) it receives is taxed as income from a property business (as opposed to being exempt like normal company distributions).

Do real estate investment trusts pay taxes?

For one thing, because REITs are considered pass-through investments, their dividends are typically considered ordinary income (not qualified dividends) and therefore are taxable at whatever your marginal tax rate (tax bracket) is.

Are real estate investment trusts exempt?

While these investors are generally exempt from paying federal tax by definition, many may still be subject to unrelated business income tax on their share of debt-financed real estate income. On the contrary, dividends issued by REITs are generally excluded from unrelated business taxable income.

Are REIT dividends taxed as ordinary income?

The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taking into account the 20% deduction, the highest effective tax rate on Qualified REIT Dividends is typically 29.6%.

How are REITs taxed in 2021?

The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.

How are real estate distributions taxed?

During the time an investor may hold a real estate investment, you may receive cash distributions in excess of the income that is allocated to you. This may occur because cash flow from the property is in excess of taxable income. The cash distributions are not taxable to you.

Why you should not buy REITs?

However, some REITs pay much higher dividends than the sector’s average. While those bigger payouts might be tempting, they can be a warning sign that a REIT’s dividend isn’t sustainable. These are sometimes called yield traps. So investors should avoid buying a REIT solely for its yield.