How Are REIT Dividends Treated for Tax Purposes?
Dividends from Non-Traded REITs can be allocated as ordinary income, capital gains, or return of capital. A return of capital distribution is defined as that part of the dividend that exceeds the REIT’s taxable income. A return of capital distribution is not taxed as ordinary income. Rather, the investor’s cost basis in the stock is reduced by the amount of the distribution. When shares are sold, the excess of the net sales price over the reduced tax basis is treated as a capital gain for tax purposes. So long as the appropriate capital gains rate is less than the investor’s marginal ordinary income tax rate, a high return of capital distribution may be attractive. (Source www.reit.com)