REIT dividends fall into three categories: capital return, capital gain, and ordinary dividend. The specific type of dividend depends on the REIT’s investment strategy and is listed in the prospectus. Investors can explore different types of REITs to determine which is best for their investment strategy.
REIT dividends come in several different types, which have different tax rates. Since Real Estate Investment Trusts, or REITs, are set up in a variety of ways, it makes sense that REIT dividends fall into several categories. Looking at the different REIT dividends will help investors understand the earnings and returns they can expect from these specialized financial products.
REITs are a specific type of opportunity to invest in real estate. The government has provided regulations for REITs to make sure they work the way they’re supposed to. One of these rules is that the REIT must distribute the majority of its current income through dividends.
The three main classes of REIT dividends are a “capital return,” a “capital gain,” and an ordinary dividend. The return of capital generally does not carry a tax rate. Experts describe this as a return on investment for the investor, where there could be a tax charge in the future depending on related sale events. There is also capital gain, which occurs when the REIT sells assets, and capital gains are taxed at the regular capital gain rates, where there are two rates for short-term and long-term gains.
A common dividend from a REIT, on the other hand, comes from the trust’s operation, often in rental properties. Here, the gain is subject to a “total marginal tax rate,” which is determined by the investor’s net worth and other factors. REIT dividends can be thought of as part of a broader class of “common dividends,” such as those that an investor earns by remaining invested in a particular stock or fund.
In addition to these general categories, the specific nature of a REIT dividend has a lot to do with the general operation of the REIT itself. Different types of REITs have very different investment strategies, where what the leadership does with their money will determine what kind of dividend is paid. A real estate investment trust may focus on buying and/or renting property, buying mortgages, or trading some rather abstract mortgage securities. All of these different strategies must be listed in the prospectus, which is what the investor analyzes to determine the relative risk and benefit before buying into the fund. Investors can explore diversified REITs as well as specific “flavors” of funds such as business, retail, or residential REITs to determine which ones are best suited for their particular investment strategy.
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