Real Estate Investment Trusts (REITs) Explained for New Investors

A real estate investment trust (REIT) is a company that owns, and usually operates, income-producing real estate or real estate debt, and that qualifies for a special federal tax status by passing tests on its income, assets, ownership and payouts. It can deduct the dividends it pays, so income passed on to shareholders is not taxed at the company level, while taxable income it keeps generally is. That structure is why REIT dividend yields tend to be high.

Key takeaways

A REIT needs at least 100 owners, cannot have more than 50% of its value held by five or fewer individuals, must pass 75% income and asset tests, and must pay dividends of at least 90% of its REIT taxable income, a tax figure that excludes net capital gain.
Listed REITs trade like stocks. Public non-traded REITs offer limited ways to sell, and a 2015 SEC bulletin warned of upfront fees of up to 15% of the offering price.
Most REIT dividends are taxed as ordinary income. Eligible investors can deduct 20% of qualified REIT dividends under Section 199A, and the 2025 tax law removed the deduction's end date without changing the rate.
In Nareit data to December 31, 2025, equity REITs returned 5.77% a year over 10 years against 14.82% for the S&P 500, but 8.96% against 8.83% over 25 years.
FFO adds back real estate depreciation and supplements GAAP results; AFFO has no standard definition.

What makes a company a REIT

REIT status is a tax classification, not a type of security. Section 856 of the Internal Revenue Code sets the tests below, described here as the Code read on October 20, 2026.

Organization and ownership tests

The company must be managed by trustees or directors, have transferable shares, be otherwise taxable as a domestic corporation, and not be an insurance company or certain kinds of financial institution. At least 100 persons must own it for at least 335 days of a 12-month tax year. It must not be closely held: under section 542(a)(2), which section 856(h) applies, more than 50% of its stock value may not be owned, directly or indirectly, by five or fewer individuals at any time in the last half of the tax year. Neither ownership test applies in the first year of the REIT election.

Income, asset and payout tests

The company must also elect REIT status on its tax return and meet section 856(c):

Income: at least 95% of gross income (excluding prohibited-transaction income) from sources such as dividends, interest, rents from real property and certain gains, and at least 75% from a narrower list that includes rents from real property, mortgage interest and gains on selling real property.
Assets: at each quarter-end, at least 75% of total asset value in real estate assets, cash and cash items, and government securities. Other securities are capped at 25% of assets, with further limits per issuer (5% of assets, 10% of its votes or value), and securities of taxable REIT subsidiaries at 25%. Section 70439 of Pub. L. 119-21 raised that last cap from 20% for tax years beginning after December 31, 2025.
Payout: under section 857(a)(1), dividends paid must equal at least 90% of REIT taxable income, calculated before the dividends-paid deduction and excluding net capital gain. That base is a tax figure, not the net income on the income statement.

Nareit's December 2025 fact sheet counts 195 REITs in the FTSE Nareit All REITs Index and puts the equity market value of the FTSE Nareit All Equity REITs index at $1.369 trillion, with a 4.07% dividend yield against 1.10% for the S&P 500.

REIT types and how they trade

Nareit, the REIT industry's trade association, groups REITs two ways in its overview of REIT types.

By what they own

Equity REITs own or manage income-producing properties such as offices, shopping centers and apartments, and earn mainly rent. Mortgage REITs (mREITs) invest in mortgages or mortgage securities and earn interest. In the fact sheet, the FTSE Nareit Mortgage REITs index yielded 12.24% at the end of 2025 and lost 26.61% in 2022; the FTSE Nareit Equity REITs index yielded 4.09% and lost 24.37% in 2022. The higher yield did not prevent the larger loss.

By how they are sold

Type	Registered with the SEC?	Where shares change hands	Main point for a new investor
Listed (public) REIT	Yes	National stock exchanges	Visible market price; shares typically bought and sold like stocks
Public non-traded REIT	Yes	Repurchase programs or secondary transactions, generally limited	No market price; limited exits; fees
Private REIT	No (exempt)	Not on exchanges	Generally can be sold only to institutional investors

The SEC's Investor Bulletin on non-traded REITs (August 31, 2015, still posted on Investor.gov) says investors generally must wait for a listing or liquidation, which might not come for more than 10 years. Redemption programs are typically limited, can be stopped without notice and may redeem shares at a discount. Upfront fees can reach 15% of the offering price, and valuations rest on periodic appraisals that may not be accurate or timely. Terms vary, so the prospectus is the document to check.

How REIT dividends are taxed

This section assumes a taxable account; in a tax-advantaged account, different rules apply.

Why most of the dividend is ordinary income

A REIT dividend is not automatically a qualified dividend, the kind taxed at lower capital gain rates. Under section 857(c)(2), only the portion the REIT designates as qualified dividend income gets that treatment, and the designation is capped, mainly by the REIT's own qualified dividend income. Capital gain dividends, also designated by the REIT, are taxed as long-term capital gain.

By market-cap-weighted average, 78% of REIT dividends paid in 2024 were ordinary taxable income, 12% return of capital and 9% long-term capital gains, per the fact sheet. A return of capital is not a dividend; under IRS Topic 404 it lowers your cost basis instead.

The Section 199A deduction

Taxpayers other than corporations may deduct 20% of qualified REIT dividends, which section 199A(e)(3) defines as REIT dividends that are neither capital gain dividends nor qualified dividend income. The IRS says this part of the deduction is not limited by W-2 wages or property basis and is available whether or not you itemize, but the total deduction is capped at 20% of taxable income minus net capital gain. A 45-day holding rule also applies (see the FAQ).

The deduction was due to expire after 2025. Section 70105 of Pub. L. 119-21, signed July 4, 2025, replaced the sunset clause with a minimum deduction for taxpayers with income from businesses they actively run, which REIT dividends alone do not qualify for. The 20% rate is unchanged, and the Code now sets no end date, though Congress can still amend it.

Per the Form 1099-DIV instructions (revised January 2024), Box 5 shows section 199A dividends, already included in Box 1a. Box 1b shows qualified dividends, Box 2a capital gain distributions and Box 3 nondividend distributions. Box 5 can include dividends where the REIT could not check your holding period, so you confirm it before claiming the deduction.

Worked example: REIT vs qualified dividend

Illustrative example. An investor puts $10,000 into a REIT yielding 4%, and the whole $400 dividend is a qualified REIT dividend taxed in the 24% federal bracket. The holding period is met and the taxable-income cap does not bind. State tax, price changes and the 3.8% net investment income tax, which per IRS Topic 559 can apply above modified AGI of $200,000 single or $250,000 joint, are ignored. The comparison stock pays a 1.5% qualified dividend taxed at an assumed 15%.

The deduction lowers taxable income, not the rate: 20% of $400 is deducted, leaving $320 taxed at 24%.

REIT, no deduction:   $400 x 24%         = $96.00 tax
REIT, with 199A:      ($400 - $80) x 24% = $76.80 tax (19.2% of $400)
Stock:                $150 x 15%         = $22.50 tax

Case	Dividend	Effective federal tax on the dividend	Tax	After-tax income
REIT, 4%, no 199A deduction	$400.00	24%	$96.00	$304.00
REIT, 4%, with 199A deduction	$400.00	19.2%	$76.80	$323.20
Stock, 1.5% qualified dividend	$150.00	15%	$22.50	$127.50

The deduction is worth $19.20 a year. The REIT investor keeps 80.8 cents per dividend dollar against 85 cents for the qualified dividend, so the stock's dividend is still taxed more lightly; it pays less only because its yield is lower (a 4% qualified yield would leave $340.00). To project reinvested dividends, use the investment growth calculator.

Reading REIT profit measures

GAAP accounting depreciates real estate, which Nareit considers artificial for property, so in 1991 it created Funds From Operations. Per Nareit's FFO entry, FFO is GAAP net income excluding real estate depreciation and amortization, gains and losses on selling certain real estate or from changes in control, and certain impairments. Nareit says it should be used only in addition to GAAP results, not as a substitute.

AFFO, per Nareit's AFFO entry, usually subtracts recurring capital spending and the straight-line rent adjustment from FFO, and has no standard definition, so check each company's reconciliation. Net asset value (NAV), per Nareit's NAV entry, is the estimated market value of assets minus liabilities and debt, per share, often using capitalization rates. Because it rests on estimates, NAV is a judgment, not a reported fact.

Returns, rates and diversification

What the long-run data show

The fact sheet's compound annual total returns to December 31, 2025 include dividends but not taxes, fund fees or an investor's timing.

Period ending Dec 31, 2025	FTSE Nareit All Equity REITs	S&P 500
10 years	5.77%	14.82%
20 years	6.57%	11.00%
25 years	8.96%	8.83%
50 years	12.08%	12.04%
1972 to 2025	10.82%	11.15%

The ranking depends on the start date. Compounding the fact sheet's annual returns for 2016 through 2025 turns $10,000 into about $17,523 in the REIT index and $39,833 in the S&P 500. The REIT index was ahead in only 2 of those 10 years (2018 and 2021) and fell in 2018, 2020 and 2022. Over 25 and 50 years it was slightly ahead, and since 1972 slightly behind. These are index figures, not a fund you could buy, and past returns do not predict future ones.

Interest rates

Rising rates can raise borrowing costs and make REIT yields look less attractive next to bonds, but the record is mixed. A July 15, 2026 Nareit analysis of the All Equity REITs index from Q1 1992 to Q1 2026 found positive returns in 77.4% of four-quarter periods when the 10-year Treasury yield rose and 78.7% when it fell. Over single quarters the gap was wider, 60.6% against 78.8%. The author linked weak results to weak growth: 12 of 13 low-growth four-quarter periods came with falling yields.

Diversification

Nareit's investor page says listed REITs have a relatively low correlation with other stocks and bonds. The 10 annual returns above give a correlation of 0.81 with the S&P 500, which is not low, though 10 data points prove little and correlations shift with the period. Both fell in 2018 and 2022, so REITs are at best a partial diversifier.

Where REITs can go wrong

Sector concentration. Industrial REITs returned -17.78% in 2024 and 17.05% in 2025; office REITs 21.50% and -13.99%, per the fact sheet. A single-sector REIT or fund carries those swings.
Leverage. Nareit reports an equity REIT debt ratio of 33.2% for Q3 2025. Debt must be paid or refinanced whatever rents do.
Distribution quality. A high yield is not safety. The SEC notes that early non-traded REIT distributions may not reflect operating earnings and may come from offering proceeds and borrowings.

Frequently asked questions

Does a REIT have to pay out all of its income?

No. The 90% test covers REIT taxable income before the dividends-paid deduction and excluding net capital gain, so the REIT may keep the rest. Under section 857(b)(1), though, REIT taxable income, which is computed after that deduction, is taxed at corporate rates, so retained income is taxed at the company level.

Can a REIT lose its tax status?

Yes. Under section 856(g), the election ends for any year the company fails to qualify and all later years, and it generally cannot elect again before the fifth tax year after that. The waiting period does not apply if, among other conditions, the failure was due to reasonable cause and not willful neglect.

What is the 45-day rule for the 199A deduction?

Per the Form 1099-DIV instructions, a REIT dividend is not a qualified REIT dividend if the shares were held 45 days or less in the 91-day period starting 45 days before the ex-dividend date. The sale day counts, the purchase day does not, and days when your risk of loss was reduced, such as by certain hedges, are excluded.

What happens to my cost basis after a return of capital?

IRS Topic 404 says it reduces the adjusted cost basis of the shares instead of being taxed when received; it appears in Box 3 of Form 1099-DIV. Once basis reaches zero, further nondividend distributions are taxable capital gains, and a lower basis means a larger gain on sale.

How can I check a non-traded REIT before buying?

The SEC bulletin says registered non-traded REITs file a prospectus (usually a "424B3" filing on EDGAR) plus Forms 10-Q and 10-K. It also advises confirming the seller is registered, using the SEC's Investment Adviser Public Disclosure site or FINRA's BrokerCheck.

A checklist before buying a REIT

Is it listed, non-traded or private, and how and when can shares be sold?
Which property sectors does it own, or does it hold mortgages?
What does its reconciliation from net income to FFO and AFFO adjust?
How much debt does it carry, and when does it mature?
How did last year's dividends split between ordinary income, capital gain and return of capital?
For a non-traded REIT: what are the fees, redemption terms and source of distributions?
What is the after-tax income at your own tax rate, with the 199A deduction and holding period?