Guides · Real estate
REITs (Real Estate Investment Trusts): Liquid Property Investing
REITs pay dividend yields that look too good next to ordinary stocks. They aren't generous — they're structurally required to hand almost everything over, and the tax consequence of that lands on you rather than on them.
Why the yield is high, precisely
A REIT is a company that owns income-producing property, and it gets a specific tax treatment in exchange for a specific obligation: distribute at least 90% of taxable income to shareholders.
The mechanism is a dividends-paid deduction. A REIT is an ordinary taxable corporation, but it deducts what it distributes — so paying out nearly everything leaves almost nothing taxed at the corporate level. A normal company's profits are taxed twice: once at the company, again as dividends.
The word to avoid is 'tax-exempt'. REITs are not exempt organisations; they're taxable entities that shrink their taxable income to near zero by design. Getting that right matters because it explains the next fact — since the income was never taxed at the company, REIT dividends are mostly taxed to you as ordinary income rather than at the lower qualified-dividend rate.
Distribute 90%+, deduct what you distribute, owe almost nothing at the corporate level. The tax moves to the shareholder.
Which account a REIT belongs in
Because the distributions are largely ordinary income, a REIT held in a taxable brokerage account generates a tax bill every year at your full marginal rate — whether or not you wanted the income.
That makes REITs a textbook case for a tax-deferred or Roth account, where the annual distributions cause no tax event at all. It's one of the clearest applications of asset location there is: the same holding in two different accounts produces meaningfully different after-tax returns.
Two softeners worth knowing. Qualified REIT dividends are eligible for the 20% §199A deduction, which takes some of the sting out. And a REIT distribution is often split across ordinary income, capital gain and return of capital, with only the first part taxed at ordinary rates — your year-end tax form breaks it out.
A REIT must distribute at least 90% of taxable income. It isn't tax-exempt — it's a taxable corporation that deducts what it pays out, which is why the yield is high and why the dividends are mostly taxed as ordinary income.