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. According to a team like the Dave Burton team, 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)