William Timlen CPA Discusses Tax Considerations for Real Estate Investment Trusts

William Timlen CPA works as a Tax Partner in the Real Estate Services Group, with more than 20 years of professional experience. William Timlen specializes in the tax aspects of partnerships and passive loss regulations, including partnership profit, loss allocations, and distributions. In the following article, William Timlen takes a dive into real estate investment trusts and the tax considerations for such investments.

Investing in real estate has long been considered one of the best ways to build wealth.

Real Estate Investment Trusts (REITs) have made such investments a reality for many Americans.

In REITs, groups of people or companies will either finance or own different real estate types that are income-producing, including shopping and storage centers, apartment complexes, hotels, and office buildings.

William Timlen CPA says that, through a REIT and relatively lower levels of cash investment requirements, real estate investing has become accessible to millions of Americans who would not otherwise be able to add real estate to an asset portfolio. Think of them as mutual funds, but for real estate.

Today, about 45% of Americans or 150 million people are members of a household that has invested in REITs through either retirement plans or investment accounts.

Because REITs are unique investment vehicles, they come with unique tax guidelines to consider before putting one's financial eggs into the attractive REIT basket.

William Timlen CPA Explains REITs Basics

There are two main types of REITs. Usually, if a REIT covers commercial real estate, it's an equity REIT, which means it makes money from either selling and buying other properties or collecting rent. REITs that primarily finance mortgages are called mortgage REITs.

Mortgages are financed in these REITs either by buying them from banks who lend to borrowers or by the REIT itself lending directly to borrowers. Some REITs are effectively hybrids, conducting activities common in both equity REITs and mortgage REITs.

To be considered a REIT, companies must invest a minimum of 75% of their assets in real estate, pay at least 90% of their taxable income annually through shareholder dividends, and get at least 75% of their income from either property rent collected, real estate sales, or mortgage interest.

William Timlen CPA explains that REIT shareholders must often cope with complicated income tax liabilities. Each type of payout and distribution that investors earn through a REIT in a taxable account is impacted by the various sources of funds acquired by the REIT, and each of those come with different tax rules.

The majority of REIT investors receive a payout that is considered ordinary income, which is therefore taxed dependent on one's income tax rate.

With the varying tax rates and the range of income scenarios associated with REITs, the best practice for investors is to consult both a financial and legal advisor when completing a tax return.

REITs and Taxes

Dividends from REITs are taxed in different ways because they can be distributed to either capital returns, capital gains, or ordinary income. Since REITs are public companies, they must give shareholders information about how the past year's dividends will be spread out for tax purposes.

William Timlen CPA notes that sales of REIT stock fall under the 20% maximum capital gains tax rate, but most REIT dividends fall under ordinary income taxation rules. The maximum rate of ordinary income tax is 37% in addition to an investment income surtax of 3.8%.

William Timlen CPA explains that in 2026, the maximum tax rate for ordinary income will rise to 39.6%. REITs are usually exempt from corporate income taxes since they pass earnings along through dividend payments.

There are some deductions to remember as well. Generally, taxpayers can deduct 20% of total business income and that includes Qualified REIT Dividends, making 29.6% the highest tax rate for Qualified REIT Dividends.

Special Considerations

Sometimes REIT dividends can qualify for reduced tax rates. This occurs when individuals paying taxes take advantage of lowered income tax rates, when a REIT makes a return of capital distribution or a capital gains distribution, or when dividends from taxable REIT subsidiaries are distributed. Sometimes, REITs are allowed to pay corporate taxes but keep certain earnings.

William Timlen CPA says that one option for investors is to keep REIT interest in a retirement plan such as a 401(k) or IRA, two forms of tax-advantaged savings plans. When investment returns are earned through such plans, the returns are not taxed.

Those who own REIT shares must fill out a 1099-DIV form from the IRS every year. Individual taxpayers must outline what they earned in dividends, as well as the type of dividends they received.

William Timlen CPA notes that REITs must tell individual investors which parts of a dividend are capital gains or losses, something that occurs when a property is sold after being held by a REIT for a minimum of a year. Investors must accept losses or gains, with gains taxes at either 0%, 15%, or 20% depending on one's income level during a tax year.