I was perusing a physical study guide from a firm that rhymes with Schmopman Schmarks, and I was surprised to read in their study guide “Key Concepts” that:
“Distributions from a REIT are taxed the same as any other portfolio income.” and that “…dividends are taxed as dividend income to the investor, and capital gains are treated as capital gains”.
How should I reconcile that with Achievable Series 66 - 3. Recommendations & strategies - 3.5. Tax considerations where it states:
“In most scenarios on the exam, you can safely assume common stocks, preferred stocks, and mutual funds pay qualified dividends unless otherwise stated. However, one specific dividend-paying investment never pays qualified dividends. **Real estate investment trust (REIT) dividends are always considered non-qualified (taxable up to 37%)**. With a higher income tax rate, REITs must offer higher rates of returns to encourage investors to purchase their units.”
I’m assuming I’m missing some nuance, so any color would be appreciated.
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Hi @Leroy_Ratke - thanks for your question. I can’t speak for the other vendor you’re using, but I’m confident the information presented on Acheivable’s program is correct. REIT dividends generally are not considered qualified (or are treated like typical cash dividends from stocks). I’ll quote this Intuit/Turbotax blog as a resource:
"Dividends from REITs are almost always ordinary income… These will normally be taxed at your regular income tax rate, the same as wages from a job, unless a portion or all of them are “qualified dividends.”
“Generally, dividends from REITs are automatically exempt from being qualified dividends. Whether dividends are qualified depends on the nature of the investment that earned the money being passed along to shareholders.”
We can also quote the U.S. Congress:
"U.S. individual shareholders pay tax at ordinary individual income tax rates on
[REIT] dividends (rather than the lower rates normally applied to dividends on corporate stock).
There are always exceptions to tax rules, but we teach the general rules as they are what NASAA is most likely to test. Here are some other resources that further confirm the way we teach REIT taxation:
FYI - I would normally directly quote IRS rules/regulations directly, but their rules on this topic are a bit convoluted.
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