How are dividends from a Real Estate Investment Trust (REIT) typically taxed?

Dividends from a Real Estate Investment Trust (REIT) are typically taxed as ordinary income. This is because REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends. As these distributions represent a pass-through of the trust's earnings, they do not qualify for preferential capital gains tax rates that apply to qualified dividends from most other entities.

Investors need to recognize that the nature of these dividends is influenced by the REIT's operational structure and tax regulations that govern them. Unlike capital gains, which are taxed differently and often at lower rates, the income received from REIT dividends is treated as regular income and taxed accordingly in the hands of the investors, reflecting the earnings generated by the trust's real estate investments.

This taxation structure emphasizes the importance of understanding how investments in REITs can impact an investor's overall tax situation, particularly as these distributions can significantly vary from standard stock dividends.