SIE practice questionhardREITs — Tax Treatment of Dividends
REIT dividends are typically taxed as:
- AOrdinary income, since most REIT distributions do not qualify for the lower qualified dividend rate✓ Correct answer
- BLong-term capital gains regardless of holding period
- CTax-free returns of capital
- DQualified dividends at the preferential capital gains rate
Explanation
Why A — Ordinary income, since most REIT distributions do not qualify for the lower qualified dividend rate
Most REIT dividends are taxed as ordinary income because they do not meet the requirements for qualified dividend treatment (REITs generally do not pay corporate tax, so the dividends don't qualify for the lower rate). However, under the Tax Cuts and Jobs Act, individual REIT investors may be eligible for a 20% deduction on qualified REIT dividends through the 199A deduction, effectively reducing the tax rate.
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