Are REITs Qualified Dividends and What Investors Need to Know

REITs can be a great way to earn income through rental properties, but understanding their tax implications is crucial. A key benefit of REITs is that they can be qualified dividends, which means they're taxed at a lower rate.

Qualified dividends are taxed at a rate of 0%, 15%, or 20%, depending on your income level. This is a significant advantage over ordinary dividends, which are taxed as ordinary income.

To be considered a qualified dividend, a REIT must meet certain criteria, such as being a U.S. corporation and meeting certain holding period requirements.

Dividends are payments made by public companies to their common stock shareholders.

Ordinary dividends can be reported to the IRS as qualified dividends, which are taxed at capital gains tax rates.

Individuals earning over $44,625 or married couples filing jointly who earn $89,250 pay at least a 15% tax on capital gains for the 2023 tax year.

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A qualified dividend is taxed at a lower rate than an ordinary dividend. This is because it meets the criteria to be taxed at capital gains tax rates.

To qualify, a dividend must meet special requirements issued by the IRS. This ensures that only eligible dividends are taxed at the lower rate.

The maximum tax rate for qualified dividends is 20% for tax year 2024, depending on your taxable income. There are a few exceptions for real estate, art, or small business stock, but these are rare.

In general, qualified dividends are a great way to save on taxes, especially for those in higher tax brackets. By understanding the rules and requirements, you can make the most of this tax advantage.

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For investors, the tax implications of qualified dividends can be a game-changer. Most regular dividends from U.S. corporations are considered qualified, but there are some exceptions, such as foreign companies, REITs, and master limited partnerships.

Some dividends are automatically exempt from consideration as qualified dividends, including those paid by real estate investment trusts (REITs), master limited partnerships (MLPs), and tax-exempt companies. These dividends don't qualify for the lower tax rate and should be reported as ordinary income.

A qualified dividend requires a shareholder to have held a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date. This is a crucial rule to follow to avoid paying the higher ordinary income tax rate.

Dividends paid from money market accounts, such as deposits in savings banks, credit unions, or other financial institutions, do not qualify as qualified dividends. They should be reported as interest income instead.

Special one-time dividends are also unqualified, and qualified dividends must come from shares not associated with hedging, such as those used for short sales, puts, and call options. These investments and distributions are subject to the ordinary income tax rate.

The 2003 tax cuts signed into law by George W. Bush introduced the concept of qualified dividends, which was designed to incentivize companies to reward their long-term shareholders with higher dividends. This change had a significant impact on the way companies distribute their profits to shareholders.

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REIT dividends are usually not qualified, meaning they don't qualify for the capital gains rate of 15%. This is because REITs have more complicated tax rules than regular stocks.

To be a qualified dividend, the payout must be made by a U.S. company or a foreign company that trades in the U.S. or has a tax treaty with the U.S. However, REITs typically don't pay qualified dividends.

REIT dividends are taxed at the investor's regular income tax rate, which can be higher than the qualified dividend rate.

Here's a summary of the tax implications for REIT dividends:

Keep in mind that tax rates may change over time, so it's essential to check the current tax rates for the year you're investing in.

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Investors can verify if their dividends are qualified by checking their online trading platform or broker's breakdown on IRS Form 1099-DIV, where qualified dividends are reported in Box 1b.

Ordinary dividends, on the other hand, are reported in Box 1a. This distinction is crucial for tax purposes.

To qualify for the lower capital gains tax rate on dividends, investors must hold a stock for more than 60 days in the 121-day period that began 60 days before the ex-dividend date.

The ex-dividend date is one market day before the dividend's record date, and investors who buy stock before this date can receive the next dividend.

Individuals who buy stock before the ex-dividend date and hold it for at least 61 days in the required period pay the capital gains tax rate on the dividend, while those who don't meet this requirement claim the dividend as ordinary income on their tax return.

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