Tax rules impose a tax rate that's lower than your regular tax rate on "qualified" stock dividends. Unfortunately, real estate investment trust, or REIT, dividends will not meet the requirements to be considered qualified. A REIT reaps tax benefits at the corporate level, leaving more cash to pay dividends to share owners.
Tax-Advantaged Business Structure
REITs are companies that either own commercial real estate properties or provide real estate financing products. If a company meets the REIT requirements, it is exempt from paying corporate income taxes. One of the requirements is that a REIT must pay at least 90 percent of net income out as dividends to share owners. As a result, many REITs carry attractive dividend yields.
REIT Dividends Can Have Different Tax Status
The net income a REIT pays as dividends to investors will be ordinary income for the shareholders and taxed at their regular tax bracket rates. However, REIT dividends are not always 100 percent ordinary income. A portion of dividend payments may be classified as capital gains or nontaxable return of capital. The Form 1009 sent by the REIT will break down the tax status of the dividends paid during the previous year.
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