How do investors treat distributions from a REIT for tax purposes?
A REIT is required by law to distribute each year to their shareholders at least 90% of their taxable income. For REITs, dividend distributions for tax purposes are allocated as ordinary income, capital gains, and return of capital—each of which may be taxed at a different rate. All public companies, including REITs, are required to provide their shareholders early in the year with information clarifying how the prior year’s dividends should be allocated for tax purposes. This information is distributed by each company to its list of shareholders on IRS Form 1099-DIV. A return-of-capital distribution is the portion of the dividend that exceeds the REITs taxable income. A number of factors can result in a portion of the dividend being a return of capital, such as the effect of depreciation. A return-of-capital distribution is not taxed as ordinary income, however. Rather, the investor’s cost basis in the stock is reduced by the amount of the distribution. When shares are sold, the exces
