Dividend Income Guide
Dividend glossary

REIT (Real Estate Investment Trust)

A REIT is a company that owns income-producing real estate and is legally required to distribute at least 90% of its taxable income as dividends. REITs let ordinary investors own real estate without buying property directly.

In more depth

REITs provide exposure to commercial real estate — apartments, office buildings, warehouses, hospitals, cell towers, data centers — through publicly traded shares. The mandatory 90% distribution requirement typically produces high yields, but most REIT dividends are taxed as ordinary income rather than qualified dividends.

How REITs work

Congress created REITs in 1960 to give everyday investors access to large-scale real estate investments, much as mutual funds gave access to diversified stock portfolios. By qualifying as a REIT, a company pays no corporate income tax — but in exchange, it must distribute at least 90% of its taxable income to shareholders annually.

That requirement is why REIT dividend yields are typically higher than most equity funds: the company must pay out most of what it earns rather than retaining cash for growth.

REIT dividend tax treatment: the key consideration

Most REIT dividends are classified as ordinary income, not qualified dividends. This means they are taxed at your full marginal income rate rather than the lower 0–20% capital gains rate that applies to most stock dividends.

The tax difference matters significantly in retirement planning:

  • In a taxable brokerage account: REIT dividends taxed at 22%, 24%, or higher (depending on your bracket)
  • In a Roth IRA: REIT dividends compound tax-free regardless of classification
  • In a traditional IRA: REIT distributions are tax-deferred

This is why financial advisors often recommend holding REIT exposure inside tax-advantaged accounts rather than taxable brokerage accounts.

Types of REITs

  • Equity REITs: Own and operate properties (most common). Subcategories include residential, retail, industrial, healthcare, office, data centers, cell towers.
  • Mortgage REITs (mREITs): Lend money to property owners or buy mortgage-backed securities. Higher risk, higher yield, income classified as interest rather than real estate income.
  • Hybrid REITs: Combine equity and mortgage approaches.

REIT funds vs individual REITs

Realty Income (O) is one of the most widely held individual REITs among retirement investors — it pays monthly and has a 30+ year streak of consecutive dividend increases. VNQ (Vanguard Real Estate ETF) provides diversified exposure to hundreds of REITs in a single fund.

Individual REITs concentrate single-property-type risk. A diversified REIT fund smooths that out at the cost of holding some weaker names alongside the stronger ones.

Funds from operations (FFO)

REITs are typically valued on funds from operations rather than earnings per share, because depreciation charges make traditional EPS misleading for real estate businesses. FFO adds back depreciation (a non-cash expense) and subtracts gains on property sales to give a more accurate picture of cash available for distribution.

Related terms

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