Tax on Mortgage REIT Dividends
A mortgage real estate investment trust, or REIT, is a hybrid investment vehicle that combines attributes of mutual funds and corporations. Investing in this type of investment provides you with the opportunity to benefit from interest rates in the mortgage industry. When you receive dividends from your investment, it is important to understand how they are taxed.
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REIT
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A real estate investment trust is a vehicle that holds real estate assets and then passes on the income that they generate to investors. In the case of a mortgage REIT, the interest payments that are received from mortgage borrowers are passed on to the investors. To qualify as an REIT, the entity must pass on at least 90 percent of the income that it brings in to the shareholders. This means that REITs have very little in the way of cash reserves.
Avoid Double Taxation
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One of the advantages of investing in real estate investment trusts is that they avoid double taxation. With traditional corporations, the company must pay corporate taxes on the money that it brings in. Then when the company passes on dividends to the investors of the business, they must pay taxes on that money as well. Since the REIT passes on at least 90 percent of its income to shareholders, they do not pay taxes at the business level.
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Income Tax on Dividends
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When you receive dividends from an REIT, you do not receive special tax treatment in most cases. The money that you receive accounts as regular income. Because of this, you add the amount of dividends that you receive to your other sources of income to determine what your taxable income is for the year. Then you pay taxes on that amount based on your marginal tax rate. By comparison, dividends from corporations often are taxed at a lower rate because they are qualified dividends.
Capital Gains Distributions
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Although the majority of dividends that are received from REITs are simply counted as income, sometimes the dividends are capital gains distributions. REITs occasionally distribute part of the capital gains that they realized from the sale of a property. When this happens, you get to pay capital gains tax rates on the dividends instead of paying taxes at your normal marginal tax rate. This has the potential to save you some money on your tax return for the year.
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