Do REITs Generate a K-1? – Avoid this Mistake + FAQs

No – most REITs (Real Estate Investment Trusts) do not generate a Schedule K-1. Instead, they issue Form 1099-DIV to report dividends to investors.

Real estate investment trusts are popular for their high dividend yields and tax advantages. A common concern for investors is whether REITs will complicate tax season with a dreaded Schedule K-1 (like many partnerships do).

Fortunately, REIT shareholders generally avoid K-1 forms altogether, making tax reporting simpler and faster.

We’ll explain exactly why REITs don’t issue K-1s, how REIT taxation works at the federal and state levels, and how it compares to other investment structures.

We’ll also highlight common mistakes to avoid, share examples of rare exceptions, and answer frequently asked questions about REIT taxes. Let’s dive in!

REITs vs. K-1 Tax Forms: No Headaches for Investors 😌

If you’ve invested in partnerships or certain funds before, you might be familiar with Schedule K-1 – an IRS form that reports your share of income, deductions, and credits from a partnership or S-corporation.

K-1s can be complex and often arrive late (sometimes delaying your tax filing). The good news is that REITs don’t use K-1s. REIT investors receive Form 1099-DIV, which is the standard IRS form for dividends and distributions.

Why no K-1 for REITs? By design, REITs are structured as corporations (or trusts) for tax purposes, not partnerships. They elect a special tax status that exempts them from corporate income tax (as long as they meet certain requirements, like paying out most of their income as dividends).

Because a REIT is essentially a corporation, it reports shareholder distributions via Form 1099-DIV – just like any public company would report its dividends. This means no partnership income is passed directly to you, so a Schedule K-1 isn’t needed in most cases.

Key Difference: A 1099-DIV simply shows the dividends you received and certain classifications of those dividends (ordinary, capital gains, etc.). In contrast, a Schedule K-1 provides a detailed breakdown of various income types (interest, rental income, depreciation, etc.) that are passed through to partners. The simplicity of the 1099-DIV is a major relief for investors: you can usually plug the numbers into your tax return without hiring a CPA to untangle them.

Investor Perspective: Many investors actively avoid investments that issue K-1s due to the paperwork hassle. K-1 forms often arrive in March or even April, which can force you to file a tax extension. They might also mean filing taxes in multiple states if the partnership operates in different locations. REITs spare you from all that.

One Reddit user vented about K-1s, saying they “greatly dislike the additional waiting time to get them.” With REITs, your tax docs are typically available by late January, so you can file on time and stress-free.

To summarize, owning REIT shares feels like owning any stock when tax time comes around – you get a nice, straightforward 1099-DIV. No complex K-1, no multi-state tax juggling, no surprises.

What Exactly Is a REIT? 🏢 Understanding the Basics

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. Think of a REIT as a mutual fund for real estate – it pools investors’ money to buy a portfolio of properties or mortgages, and then passes most of the income back to investors as dividends. REITs can own all sorts of properties: shopping malls, apartment complexes, office towers, hospitals, data centers, cell towers – you name it. There are also mortgage REITs which invest in real estate loans rather than physical properties.

REITs were created by Congress in 1960 to give everyday investors access to large-scale real estate investments, which previously were available only to institutions or the very wealthy.

The idea was to allow small investors to earn rental income and real estate profits without buying properties themselves. To make this work, Congress gave REITs a special tax status with two big conditions:

1. REITs must distribute most of their income as dividends. Specifically, a REIT is required by law to pay out at least 90% of its taxable income to shareholders annually. (Most REITs actually aim to pay 100% of taxable income to avoid any corporate tax.)

2. REITs must stay focused on real estate. At least 75% of a REIT’s assets must be real estate, cash, or U.S. Treasuries, and at least 75% of its gross income must come from rents, mortgage interest, or real estate sales. Basically, REITs can’t stray far from the real estate business or they’d lose their tax-favored status.

There are a few more technical requirements (like having at least 100 shareholders and not having just a few people own the whole thing), but the gist is: REITs trade off flexibility for tax benefits.

By fulfilling these conditions, a REIT doesn’t pay federal corporate income tax. This is huge – it avoids the “double taxation” that normal corporations face (where the company pays tax on profits and then you pay tax again on dividends).

From a corporate standpoint, most REITs are set up as regular C-corporations (often organized in states like Delaware or Maryland) that elect REIT status with the IRS. Some are organized as trusts or LLCs but with special provisions to be taxed as REITs. Regardless of legal form, once they elect REIT status by filing Form 1120-REIT with the IRS, they commit to those rules above.

Bottom line: A REIT is a tax-advantaged real estate company. It behaves like a pass-through entity in that it generally doesn’t pay tax itself – but unlike a partnership, it issues 1099-DIV forms to investors for the dividends they receive. That combination (no corporate tax, but simple shareholder taxes) is exactly why REITs are often said to blend the best of partnerships and corporations.

Federal Tax Treatment of REIT Dividends 🏛️

So what happens when you invest in a REIT and start receiving dividends? Since the REIT doesn’t pay federal income tax at the corporate level (if it follows the rules), the tax burden shifts to you, the shareholder. However, not all REIT dividends are taxed the same way. Let’s break down the typical components of a REIT’s distribution as shown on your 1099-DIV:

• Ordinary Income Dividends: The majority of REIT dividends usually falls into this category. These are taxed at your ordinary income tax rate (just like wages or interest income). Unlike qualified dividends from regular corporations, most REIT dividends do not qualify for the lower long-term capital gains tax rate. This might sound like a drawback, but keep in mind the REIT has already avoided corporate tax upfront. Plus, as we’ll see, there’s a special deduction to ease the sting.

• Return of Capital (Non-Taxable Distributions): Sometimes a portion of the dividend is labeled as “return of capital” (ROC). This part is not immediately taxable. Essentially, it’s considered a return of some of the money you invested, so it lowers your cost basis in the REIT shares. Later, when you sell the shares, the ROC amounts you accumulated will result in a higher capital gain (or smaller loss) because your adjusted basis was lower. It’s a tax deferral mechanism. REIT distributions can include return of capital because of depreciation and other non-cash expenses that shelter some of the income the REIT generates.

• Capital Gain Distributions: If the REIT sold some properties at a profit, it may distribute long-term capital gains. These get passed to you and are taxed at the favorable capital gains tax rates (15% or 20% for most high earners, plus possibly the 3.8% net investment tax). These will be identified on the 1099-DIV, often as “capital gain dividends.”

• Section 199A Dividends (20% Deduction): Here’s a nice bonus courtesy of Congress. Under the 2017 Tax Cuts and Jobs Act, REIT dividends qualify for a 20% deduction for individuals (this is the Section 199A qualified business income deduction). In practice, this means you can deduct 20% of your REIT ordinary dividends when figuring out your taxable income. For example, if you received $1,000 in ordinary REIT dividends, typically $200 of that might be deductible, so effectively only $800 is taxable. This deduction is available regardless of your income level (unlike some other parts of Section 199A that phase out), making REITs particularly tax-efficient for high earners. Note: This applies to the ordinary income portion of REIT dividends, not the capital gain or return of capital parts.

All these details are conveniently reported on Form 1099-DIV that the REIT (or your broker) sends you. You’ll typically see totals for “ordinary dividends” (Box 1a), “qualified dividends” (Box 1b – usually $0 or a small fraction for REITs), “total capital gain distributions” (Box 2a), and possibly “nondividend distributions” (Box 3, which indicates return of capital). There’s also a checkbox for Section 199A dividends (Box 5) which signals how much of your dividends might qualify for that 20% deduction.

Important: Because REITs don’t pay tax at the entity level, you are responsible for paying tax on the income (to the extent it’s taxable) at your own rates. This means REIT dividends can add to your taxable income and potentially push you into higher brackets, etc., so plan accordingly. The upside is the 20% deduction and the fact that some of it might be tax-deferred ROC or lower-taxed gains.

Example: Imagine you invested in a REIT that paid you $5,000 in total dividends this year. Your 1099-DIV from the REIT might break it down as follows:

• $3,500 ordinary dividends (Box 1a, non-qualified, fully taxable as ordinary income, but eligible for the 20% deduction, so effectively $2,800 taxable after the deduction).

• $500 capital gain distributions (taxed at capital gains rate).

• $1,000 return of capital (non-taxable now, but you’ll subtract this from your purchase cost basis).

In this scenario, you’d include the $3,500 (minus the deduction) and $500 of gains on your tax return’s income sections. The $1,000 isn’t reported as current income – instead, you quietly adjust your basis in the REIT stock.

One more federal tax nuance: REITs can be held in tax-advantaged accounts (IRAs, 401(k)s, Roth IRAs) without issues. In a retirement account, REIT dividends aren’t taxed each year (which is great since they’re normally ordinary income). And unlike MLPs or other partnerships, REIT investments do not generate Unrelated Business Taxable Income (UBTI) for IRAs. UBTI is a special tax that can hit IRAs if they invest in partnerships engaged in active business or leveraged investments – but dividends from a REIT are just like corporate stock dividends, exempt from UBTI. This makes REITs very friendly for retirement investing: you get high income without current tax or surprise IRS filings. (In contrast, an MLP in an IRA that generates too much UBTI can actually trigger a tax bill inside your IRA – something investors try to avoid.)

Form 1099-DIV vs. Schedule K-1: Understanding the Difference 📑

Let’s drill deeper into the two forms we’ve been talking about – Form 1099-DIV and Schedule K-1 – and why getting one versus the other matters so much.

Form 1099-DIV is titled “Dividends and Distributions.” Corporations (including REITs) and funds issue 1099-DIV to anyone who received more than $10 in dividends or capital gain distributions in a year. If you own stocks, mutual funds, ETFs, or REITs, you’re probably already familiar with this form. It typically arrives by late January or early February. The key elements on a 1099-DIV include:

• Total ordinary dividends (Box 1a).

• Qualified dividends (Box 1b – a subset of 1a that qualifies for lower tax rates; for REITs this is usually zero or very little).

• Capital gain distributions (Box 2a, etc. for different types of gains).

• Nondividend distributions (Box 3, which is return of capital).

• Section 199A dividends (Box 5, the amount of REIT dividends eligible for the 20% pass-through deduction).

• Any federal or state tax withheld (Boxes 4 and 14, which are rare for REITs unless you requested withholding).

For most investors, the 1099-DIV information gets entered on your Form 1040 (via Schedule B for interest/dividends and Schedule D for capital gains, if applicable). It’s straightforward: one number for ordinary dividends (though you might need to report qualified vs non-qualified breakdown, which the form provides) and one for capital gains.

Schedule K-1, on the other hand, comes from partnerships (as well as S-corporations and certain trusts). If you invest in a master limited partnership (MLP), a private real estate partnership, an S-corp, or certain hedge funds, you’ll get a K-1. This form is more complex:

• It lists your share of various types of income: rental income, interest income, dividends, capital gains, etc. (Yes, a partnership can pass through dividends and interest it received.)

• It also includes your share of deductions: depreciation, business expenses, etc.

• Credits and other items are listed too.

• Importantly, a K-1 can show taxable income that is higher or lower than the cash you actually received. For instance, an MLP might pay you $1,000 in cash distributions but your K-1 might only show $100 of net taxable income (thanks to depreciation sheltering the rest). Alternatively, it could be the opposite for some investments (though less common): you might not get cash, but the K-1 shows taxable income (which can happen in some funds).

K-1s often show state-by-state breakdowns of income as well, because states want to tax your share of any income earned within their borders. If a partnership operates in, say, Texas and California, the K-1 might apportion income to those states, implying you may need to file a non-resident tax return in each state where the income is above some threshold.

Why investors prefer 1099-DIV over K-1:

• Timing: 1099-DIVs are issued early. K-1s often come later because partnerships need more time (they wait for all their internal accounting). If you hold 10 different MLPs, you might be collecting K-1s right up to the April 15 deadline. Many K-1 investors end up filing for an extension each year.

• Simplicity: With a 1099-DIV, you usually just report the dividend income. With a K-1, you must handle multiple forms on your tax return (often a Schedule E for partnership income, etc.) and ensure all the various boxes are correctly accounted for. It’s doable for a DIY tax filer but definitely more tedious. It’s easy to make mistakes if you’re not experienced, which could draw IRS attention.

• Software/Compatibility: Tax software handles 1099-DIVs effortlessly. K-1s are also supported, but if you have many or they have unusual entries (like cancellation of debt income or alternative minimum tax items), it can get tricky.

• Cost: If you use a tax professional, many will charge extra for each K-1 you hand them because it’s more work. Over years, those costs (or the value of your time if you do it yourself) are non-trivial.

• State Taxes: As mentioned, K-1s can drag you into filing taxes in multiple states. Practically, if the amounts per state are small, some individuals skip filing non-resident returns, but technically you’re supposed to. A 1099-DIV from a REIT never forces multi-state reporting – you simply report all the income in your home state return (or wherever you’re tax-resident). This is a big plus for hassle reduction. Imagine receiving one K-1 for each property a partnership owns versus one 1099 for a diversified REIT – the choice is clear for a stress-free life.

• UBTI Concerns: For those holding investments in an IRA, K-1 income can sometimes trigger taxes inside your retirement account (UBTI as discussed earlier). 1099-DIV income (from REITs) will not. This means you can load up your IRA with REIT funds without worrying about an unexpected IRS bill, whereas too much MLP exposure in an IRA could cause problems.

In short, Form 1099-DIV keeps things simple and clean, while Schedule K-1 can introduce complexity and delays. REITs’ ability to use the 1099-DIV is a selling point for many investors. In fact, some investment firms have explicitly structured products as REITs rather than partnerships to cater to investors who demand simplified tax reporting.

Real-World Example: Blackstone, one of the world’s largest alternative asset managers, historically offered real estate funds structured as partnerships (which issued K-1s). In 2017, they launched Blackstone Real Estate Income Trust (BREIT) – a non-traded REIT. Part of the appeal was to target high-net-worth investors and advisors who hated dealing with K-1s. BREIT issues a 1099-DIV for its hefty distributions, making it much friendlier for investors’ tax prep. Similarly, Blackstone’s own stock (BX) was a publicly traded partnership for years (with a K-1), but in 2019 Blackstone converted to a corporation, eliminating the K-1 and moving to 1099-dividend reporting. These moves reflect a broad trend: investors (and companies) favor structures that avoid K-1s to broaden the potential investor base.

Pros and Cons of REITs (1099-DIV) vs. Partnerships (K-1) 💡

It’s not all one-sided – there are pros and cons to the REIT structure versus a pass-through partnership structure. Here’s a comparison from a tax and investor standpoint:

As you can see, REITs shine in simplicity and avoidance of headaches, while partnerships might offer more nuanced tax benefits (like using losses) at the price of complexity. For most individual investors, the simplicity of REITs is a major advantage. However, very sophisticated investors sometimes like K-1 deals because they can defer taxes significantly (for example, MLP investors often enjoy years of tax-sheltered cash flow due to depreciation). It boils down to a trade-off between immediate simplicity vs. potential long-term tax optimization.

State Tax Nuances: One State, Not Fifty 🗺️

Another important consideration is how your investment’s income is taxed at the state level. With REITs, this is refreshingly straightforward for investors. Here’s how it works:

When you receive dividends from a REIT, you will pay any applicable state income tax only in your state of residence (assuming your state taxes dividends at all). The REIT itself might own properties in many states, but you won’t be dragged into filing a bunch of state tax returns because of it. The reason is that, as a shareholder, you’re receiving a dividend from a corporation. It’s not “your” share of the property income directly – it’s a distribution of corporate earnings. So, for state tax purposes, it’s treated like any other dividend or investment income.

Contrast this with a partnership (like a real estate LP or an MLP). If the partnership earns income in several states, technically each state wants its cut of the taxes on the income attributable to that state. The partnership’s K-1 will often include a state schedule breaking down, for example, $500 of your income came from Illinois, $300 from Texas, $200 from New York, etc. If those states have income tax (Texas doesn’t, Illinois and NY do), you could be required to file a non-resident tax return in each state where the income is above some minimal threshold. That means possibly hiring accountants or buying software for multiple states – a messy situation for an individual with a small investment.

With REITs, you avoid that multi-state headache. The REIT handles any state-level obligations at the corporate level. Some states may charge the REIT entity directly (like property taxes obviously, or maybe state corporate taxes or fees), but that doesn’t flow through to you in terms of filing requirements. You just report the dividends on your home state return. If you live in a state with no personal income tax (say Florida or Texas), then congratulations – your REIT dividends have zero state tax anywhere. If you live in a state that does tax dividend income (most states do), you’ll include those dividends as part of your taxable income on your state form, just like you would for interest or non-REIT dividends.

Example: You’re a resident of California (which taxes personal income at a high rate). You own a REIT that has properties in 20 different states. The REIT earns lots of rental income nationwide, pays the necessary property and state business taxes itself, and then sends you a dividend. You’ll report that dividend on your California resident tax return and pay California tax on it (since CA taxes its residents on all their income, even from out-of-state sources). You do not have to file 19 other state returns for the REIT’s operations elsewhere. Now imagine you invested in a non-REIT real estate limited partnership with the same multi-state properties: you might be looking at K-1s and potential filings across many states. Big difference.

In summary, REIT investments keep your state tax world simple: one state (your state of residence) to worry about. This is a relief, because dealing with multiple state tax departments can be a nightmare. Each state has its own forms, deadlines, and rules. Avoiding that hassle is a hidden but significant benefit of the REIT structure for individual investors.

Rare Exceptions: When Might a REIT Investment Involve a K-1? 🕵️

By now, we’ve established that typical REIT shareholders do not get K-1s. But are there any scenarios where a K-1 could sneak into the picture of a REIT investment? There are a few edge cases to be aware of, though they usually don’t affect the average investor:

• Private Real Estate Funds Labeled as “REIT”: Some private real estate investment funds create an internal REIT to hold properties (often to block UBTI for certain investors or to optimize taxes), but then raise money through a partnership or LLC structure. If you invest in such a fund, you might technically be a partner in an LLC that owns a REIT subsidiary. In that case, you’d still get a K-1 (from the top-level LLC) because you’re a partner in a partnership, even though that partnership’s assets include a REIT. This is a bit convoluted, but the key is to know what entity you are investing in. If it’s an LLC or LP fund, the K-1 is coming, REIT or not at the property level.

• UPREIT Operating Partnerships: A common structure for many large REITs is the Umbrella Partnership REIT (UPREIT). In an UPREIT, the publicly traded REIT is essentially a holding company that owns an operating partnership (OP). The REIT shareholders own shares of the REIT, and the REIT owns units of the OP. Meanwhile, property contributors (like developers who sold their buildings to the REIT) might take OP units instead of cash, allowing them to defer capital gains on the sale. Those OP unit holders are effectively partners in the underlying partnership. Guess what form they get? Yes, a K-1 from the OP. However, as a regular public shareholder, you’re not holding OP units – you’re holding REIT shares. You get the 1099-DIV, the OP unit holders get K-1s. Unless you’re in the inner circle of a REIT deal or a sponsor who contributed property, you won’t encounter this scenario personally. It’s an interesting footnote, though: K-1s do exist behind the scenes in REIT structures, but they’re confined to those partnership units not owned by the public.

• Partnering with a REIT on a JV: Sometimes, a REIT might partner with another big investor to co-own a property via a joint venture LLC. If you happened to be that partner (e.g., you’re a large institutional co-investor), your JV interest could issue a K-1 to you. Again, this is not the situation for a typical retail investor in REIT stocks, but it shows that REITs aren’t allergic to partnerships – they just usually keep that at a level that doesn’t involve the public shareholders.

• Misconceptions (Not Real REITs): Be careful that what you think is a REIT is actually a REIT. Some people might invest in something like a real estate crowdfunding project or a syndication and assume it’s like a REIT because it’s real estate – but those might actually be partnerships. For instance, certain crowdfunded deals or “real estate LLCs” give off REIT vibes (pooling money to own property) but for tax purposes they’re partnerships issuing K-1s. Platforms like Fundrise popularized the term “eREIT” for their offerings which indeed are structured to issue 1099s, but not every platform does that. When in doubt, check the expected tax forms before investing. If avoiding K-1s is important to you, verify that the investment is a REIT or other 1099-reporting vehicle.

• Historical Quirks: In the past, there were some instruments like certain trust preferred securities or mortgage trusts that had different tax characteristics. A few might have issued K-1s despite being “trusts,” but those are very much exceptions and often legacy situations. Modern REITs, whether publicly traded or non-traded, virtually all stick to the 1099-DIV reporting.

For the vast majority of investors, you will never receive a K-1 from a REIT stock investment. If you do get a K-1 from something real estate-related, chances are you invested in a partnership, not a REIT itself, or you are in a unique position (like those OP unit holders). Always read the offering documents or ask the fund sponsor, “What tax form will I receive?” to be sure.

REITs vs. Other Pass-Through Investments (MLPs, LLCs) 📊

To fully appreciate the convenience of REITs, it helps to compare them to other popular pass-through investments:

• Master Limited Partnerships (MLPs): These are often energy infrastructure assets (pipelines, etc.) or natural resource companies structured as partnerships. MLPs do issue K-1s. They tend to have high yields and often use depreciation to shield income (so your K-1 might show low taxable income relative to cash distributions). MLP investors enjoy tax-deferred income until they sell (as their cost basis drops each year by the untaxed portion), but they pay for it in complexity. Also, many mutual funds won’t hold MLPs beyond a small allocation because K-1 income doesn’t mix well with mutual fund tax rules – which is why you often invest in MLPs directly or via special funds that themselves become corporations.

• LLCs and Private LPs: Many private investments (say, a private equity fund, or a real estate syndication, or even certain publicly traded companies that are actually LLCs/LPs) will issue K-1s. An example in the public markets: Brookfield Asset Management used to have entities like Brookfield Property Partners (an LP) that issued K-1s, or some midstream companies trade as LLCs but taxed as partnerships. If you buy those, you’re in for K-1s. Some companies have opted to convert to C-corp status (issuing 1099s) to attract more investors – similar to the Blackstone example mentioned.

• S-Corporations: If you invest in a small business as an S-corp (not common for public investments, but say you own a stake in a private business that elected S-corp), you’d get a K-1 (technically an S-corp K-1, which is slightly different but conceptually similar). S-corps are limited to 100 shareholders and not open to public investment, so not directly relevant to REITs, which by nature have broad ownership.

• Business Development Companies (BDCs) and Funds: BDCs are another high-yield structure (they lend to small businesses) and they, like mutual funds, issue 1099s (they’re regulated investment companies). So if someone likes income but hates K-1s, they might choose REITs or BDCs or high-dividend stocks, rather than MLPs or private deals. It’s good to know there are plenty of 1099-issuing income investments out there.

Comparing REITs & MLPs directly:

• Both avoid corporate tax (REIT via dividends paid deduction, MLP by being a partnership).

• MLP distributions are largely tax-deferred until you sell (your taxable income each year might be low or even zero while still getting cash – nice, but then on sale you might face a big tax bill including recapture of depreciation).

• REIT distributions are largely taxed each year (with some deferral via return of capital and the 20% deduction to soften it).

• MLPs require K-1 filing and possible multi-state filings; REITs don’t.

• For an investor in a high tax bracket who doesn’t mind complexity or never plans to sell (or will pass units to heirs where gains get a step-up basis), an MLP can be very tax-efficient because of the deferral. For an investor who just wants steady income and simplicity, a REIT is far easier.

• Also, if you’re investing via a tax-advantaged account or you hate paperwork, REITs clearly win. Many financial advisors steer clients away from K-1 investments for those practical reasons, unless there’s a compelling benefit.

At a higher level, REITs have become mainstream investment vehicles (you can buy them like any stock, and they’re in indexes, ETFs, retirement accounts, etc.), whereas K-1 partnerships remain a niche that appeals to certain investors. This is why REITs have much larger market participation; indeed, the REIT sector has a dedicated index and is part of many target-date and broad equity funds. Simplicity in taxes is one contributing factor to that popularity.

Common Misconceptions and Mistakes to Avoid 🚫

When it comes to REIT taxation and K-1 forms, a few misconceptions often trip up investors. Make sure you’re not falling for these common mistakes:

• Assuming REIT dividends are tax-free because the REIT pays no tax: Some folks think, “Hey, the REIT doesn’t pay taxes, so maybe I don’t either.” Nope. REIT dividends are typically taxable to you (unless you’re in a tax-free account). The benefit is one layer of tax instead of two, not zero tax. Always set aside funds for taxes on those dividends if you’re investing in a taxable account.

• Mistaking REIT dividends for qualified dividends: Unlike most corporate stock dividends which are “qualified” for the lower 15%/20% tax rate, REIT ordinary dividends are not qualified in that sense. They’re taxed at ordinary rates. Don’t be shocked at tax time by a bigger bill. The silver lining, as discussed, is the 20% deduction (Section 199A). Ensure you or your tax preparer applies that deduction.

• Ignoring the Form 1099-DIV breakdown: It’s easy to just take the 1099-DIV and enter the totals, but pay attention to how much is nondividend distribution (return of capital) vs capital gains vs ordinary. The return of capital portion isn’t taxed right away, but you need to subtract it from your cost basis. Keep track of your basis in each REIT stock, especially if you reinvest dividends or have ROC – otherwise you might pay too much tax when you sell (or too little, which could cause problems). A little spreadsheet or using your brokerage’s cost basis tracking can help.

• Failing to leverage tax-advantaged accounts: If you’re investing for income and you have room in an IRA or Roth IRA, consider putting REIT investments there. REIT dividends won’t be taxed annually in an IRA, eliminating the ordinary income hit. Since REITs don’t have the UBTI issue, they’re perfectly suited for IRAs. A common mistake is putting something like an MLP in an IRA (which can cause tax issues via UBTI) and keeping REITs in taxable accounts. Often, it should be the opposite (REITs in IRA for shelter, MLPs if any in taxable so you can use losses and credits and avoid UBTI complications).

• Overlooking state tax impacts: As we noted, you typically don’t need to file in multiple states for REITs. However, if you are an out-of-state investor in a private REIT that withheld state tax (some non-traded REITs might withhold state tax on distributions for non-residents in certain cases), you should file in that state to claim a refund or settle up. This is rare, but just be aware if any withholding is noted on your 1099 (Box 14) – don’t ignore it.

• Investing in K-1 partnerships unknowingly: Make sure you know if an investment issues a K-1 or not. If you buy something like “ABC Partners LP” on the stock exchange, it will give you a K-1 even if it trades like a stock. If you only want 1099s, stick to REITs, C-corp stocks, ETFs, mutual funds, and avoid those LPs/MLPs. Many new investors have been surprised by a K-1 in the mail from an investment they didn’t realize was a partnership. Double-check the structure (it’s usually in the name or described in the profile).

• Thinking you can avoid taxes by not getting a form: Some might think, “If I don’t get a 1099 or K-1, maybe it’s tax-free.” Wrong – if you should have gotten one and didn’t, you must still report the income. Thankfully, REITs are good about sending 1099s and brokers include them on consolidated 1099s. Don’t ignore it; the IRS gets a copy of that 1099-DIV too.

By staying informed and organized, you can enjoy REIT income without unpleasant surprises. The overall message is that REITs make tax time easier than many alternative investments, but you still have to do your part in reporting correctly.

Frequently Asked Questions (FAQ) 🤔

Q: Do all REITs avoid K-1 forms?
A: Yes. Virtually all REITs issue Form 1099-DIV instead of Schedule K-1. Only very unusual scenarios (like investing via a special partnership that holds a REIT) would involve a K-1.

Q: What tax form do REIT investors get at tax time?
A: REIT investors receive IRS Form 1099-DIV, which reports the dividends and distributions paid by the REIT during the year.

Q: Why don’t REITs issue Schedule K-1s?
A: Because REITs are taxed as corporations (with special rules) rather than as partnerships. They pay dividends like regular companies, so they use 1099-DIV to report shareholder payments.

Q: Are REIT dividends qualified for the lower tax rate?
A: Generally, no. Most REIT dividends are non-qualified and taxed at ordinary income rates. However, they qualify for a 20% deduction (Section 199A) to help reduce the effective tax rate.

Q: Can a REIT ever issue a K-1 to investors?
A: No – not for common shareholders. Only unusual cases (like being part of a REIT’s operating partnership as a contributor) involve a K-1, which typical investors won’t encounter.

Q: Do REIT ETFs or mutual funds issue K-1s?
A: No – they issue 1099s as well. REIT ETFs and mutual funds pass REIT income to you and report it on a standard Form 1099-DIV (no K-1 for fund investors).

Q: Is a K-1 better for tax purposes than a 1099-DIV?
A: Not necessarily. K-1 investments can defer more taxes (via losses/depreciation) but are complicated. 1099-DIV investments are simpler and more straightforward. It’s a trade-off between potential tax benefits and ease of use.

Q: How can I tell if an investment will issue a K-1 or 1099?
A: Check its legal structure. REITs, C-corporations, ETFs, and mutual funds issue 1099s. Limited partnerships, LLCs (taxed as partnerships), and S-corps issue K-1s. When in doubt, read the investment’s tax info or ask.

Q: Do REITs have to pay taxes in every state they own property?
A: The REIT handles any state taxes internally (like property or state business taxes). As a shareholder, you generally only owe tax in your home state on the dividends you receive.

Q: What happens if a REIT doesn’t meet the 90% payout requirement?
A: It risks losing REIT status and getting taxed as a regular corporation (paying corporate tax). That’s a big penalty, so REITs ensure they meet the requirements to keep their status.

Q: Are REITs a good choice for retirement accounts?
A: Yes. REITs work well in IRAs and Roth IRAs. Their dividends grow without annual taxes, and REITs don’t generate UBTI. That makes them ideal for tax-deferred or tax-free retirement growth.

Q: How do I use the 20% REIT dividend deduction?
A: Use the Qualified Business Income deduction form (IRS Form 8995/8995-A). Your 1099-DIV shows the REIT dividends eligible for the 20% deduction, and you can deduct 20% of that amount on your tax return.

Q: Do I need to keep the 1099-DIV after filing taxes?
A: Yes. Keep all tax documents for a few years. Your 1099-DIV is proof of your reported income and shows details (like return of capital) that you might need when you sell shares.

Q: Can I avoid taxes on REIT dividends somehow?
A: No magic trick in taxable accounts – you’ll owe tax on REIT dividends (after the 20% deduction). The only way to avoid tax is to hold REITs in a tax-advantaged account (like an IRA).