As mentioned earlier, REITs must distribute at least 90% of their taxable income to shareholders. REITs simplify government tax reporting for individuals because the government`s tax consequences and filing requirements for multi-state real estate portfolios are not passed on to the investor through the REIT. Shareholders only recognise dividend income and pay taxes in their country of residence. REITs offer comparatively low correlation to other assets, making them an excellent portfolio diversifier with the potential to reduce overall portfolio risk and increase returns. Competitive total returns for REITs are primarily due to stable dividend income. Often, investments in REITs are made explicitly for the dividend income potential of REITs that is paid out over time. Historically, REIT dividend yields have generated a steady stream of income under various market conditions. Reliable dividend returns over time are a driving force for investors who choose REIT investments to save or invest in retirement or another investment. If a REIT fails to declare the dividend in the previous taxation year, there is always a remedy. The REIT may deduct dividends from the previous taxation year if the dividend is declared before the due date of its tax return, including renewal, and if the dividend is paid within 12 months of the end of the REIT`s taxation year. As soon as the dividend of the previous fiscal year has been declared, it must be paid at the latest with the next regular dividend. The tax treatment of REIT dividends distinguishes them from ordinary corporations that must pay corporate income tax on their profits.

For this reason, dividends paid by common corporations are taxed at the most favourable dividend tax rate, while dividends paid by REITs are not eligible for favourable tax treatment and are taxed at normal income tax rates up to the maximum rate. Want to explore REITs that pay monthly dividends? Check out the link below. While you`re at it, you can also browse our full list of dividend-paying REITs here. If an REIT does not meet the distribution requirement and does not elect to one of the above three options, it is not a REIT and will be taxed as a C Corporation. Some practitioners believe that if a corporation continues to meet all other REIT requirements, the REIT will be taxed as a REIT in the following taxation year. Others believe that the five-year re-election ban applies and that the REIT will be taxed as a C corporation for a period of five years. Given the uncertainty surrounding the application of this rule, it is essential that a REIT comply with its dividend distribution requirement. A REIT must also be aware of potential tax problems for the state and local authorities.

While some jurisdictions comply with federal REIT law, others do not, particularly with respect to dividends granted. This could result in tax liability within the REIT in state and local jurisdictions, even if there is no taxable federal income. Government adjustments can also result in a REIT having government income and, therefore, a government tax liability. In addition, some states have an exemption, excise tax, or wealth tax to which the REIT is subject. For more information on the legal requirements for REITs, see the West Group`s Real Estate Investment Trust Handbook. On the contrary, dividends issued by REITs are generally excluded from the company`s unrelated taxable income. Similar benefits may also apply to foreign investors, who may be able to use a REIT vehicle to mitigate U.S. reporting and withholding tax on dividend income and the final sale of REIT shares. That`s because a REIT`s dividend payout isn`t earnings-based, but is part of the company`s cash flow statement.

A cash flow statement essentially describes what a company does with the money it earns. For REITs, dividends appear in the cash flow statement. In this context, profits include special accounting rules that sometimes result in low payout ratios for this type of business. Whether REITs are public or private, they must pay the usual 90% of their revenue. With stable income and required dividends, REITs offer a generally profitable return to investors. A “dividend granted” is a constructive distribution of REITs` earnings and earnings. From the shareholders` point of view, it will be considered a taxable dividend in the Confederation`s income tax return for the current year. The shareholder is expected to immediately reinvest the dividend in the REIT, thereby increasing the paid-up capital of the REIT and increasing the shareholder base in the REIT`s shares.

This allows the REIT to retain cash in the REIT and increase shareholder investment in the REIT. All shareholders must approve the dividend by completing and signing Form 972, and the REIT will complete Form 973. Both forms must be filed with the REIT`s tax return and no later than the REIT`s tax return due date, including renewals. If a shareholder does not agree and no cash is distributed, there will be a preferred dividend in respect of the class of shares with the dividend granted, and no amount in respect of that share is eligible for deduction of dividends paid. While it`s good news in many ways that REITs tend to have above-average dividend yields, it also means they`re taxed at higher rates. In addition, the nature of taxation can be complex due to several factors discussed above. If you don`t have a REIT in a retirement account, you`ll likely be taxed at the company level and on an individual basis. Dividends on public REITs are taxed as ordinary income, so there is no significant tax break for investors. A best practice is to monitor the REIT`s estimated taxable income and distributions paid during the year to meet REITs` distribution requirements and avoid a potential shortfall.

An essential part of REIT compliance is ensuring that the REIT meets sales requirements. If the REIT`s year-end distributions are insufficient, consult with your tax advisor to discuss and evaluate your best options to ensure the REIT meets the distribution requirement. If a REIT declares a dividend to shareholders of record in that quarter in the 4th quarter of a taxation year (October, November, December), but does not pay the dividend until January of the following year, the distribution is deemed to have been paid on the last day of the taxation year (i.e., December 31). The REIT will include distribution in the current fiscal year; However, the shareholder must also include the dividend in his taxable income for the current taxation year. These dividends are deemed to have been paid on the last day of the taxation year. The REIT must have profits and profits during the taxation year to classify these distributions as dividends. Although an annual dividend of 90% is required by law and IRS regulations, different REITs pay under this requirement under different schedules. Let`s say an investor buys 100 shares of a REIT at $20 per share and pays a monthly dividend of $200. The share price drops to $15 when the investor receives their first monthly dividend payment of $200 and is reinvested in the REIT.

At least 75% of the REIT`s gross annual income must come from property-related income, such as real estate rents and interest on bonds secured by mortgages on real estate. Another 20% of the REIT`s gross income must come from the sources listed above or other forms of income such as dividends and interest from non-real estate sources (such as interest on bank deposits). No more than 5% of a REIT`s income can come from ineligible sources, such as service fees or a non-real estate business. REIT shares have the potential to increase in value over time, which increases the value of the stake, as growing stocks tend to pay even higher dividends.