How are REIT distributions taxed?

• A. They are always tax-exempt
• B. They are qualified dividends taxed at preferential rates
• C. They are taxed as ordinary income and are not qualified dividends
• D. They are taxed as capital gains only

Answer: (C)

REIT distributions are taxed as ordinary income to the extent the REIT has current and accumulated earnings and profits. They are not eligible for the lower, qualified-dividend tax rates. A portion of the distribution may be a return of capital, which reduces your basis and is not taxed as income until you sell the shares. Any amount over your basis is taxed as a capital gain. Some distributions may be capital gains distributions if the REIT has capital gains, but the typical tax treatment is ordinary income rather than qualified dividends or tax-exempt income.