REITs and Section 199A Qualified Dividends: Tax Implications

Investors in the United States 🇺🇸 will face a familiar but time‑sensitive decision heading into year‑end: how to handle the tax break tied to Real Estate Investment Trust dividends as the clock on the 2017 tax law continues to tick.

Section 199A of the Internal Revenue Code still allows a 20% deduction on certain REIT payouts—known as qualified REIT dividends—but only when a set of technical rules are met. Those rules include a strict 45‑day holding period window and careful tracking of what portion of a REIT distribution counts for the deduction. As of September 7, 2025, no new federal change has been announced that alters these rules for the current tax year, but the scheduled end of the Section 199A deduction after 2025 keeps pressure on both investors and fund managers to follow the details closely.

Background: Why REITs matter and how they’re taxed

At the heart of the matter is the special tax status Congress gave REITs through Section 856, which lets certain real estate companies avoid tax at the entity level if they meet tight tests and, crucially, pass on most of their earnings to shareholders.

• By law, a REIT must pay out at least 90% of its taxable income as dividends each year.
• That regular cash flow is why REITs remain popular for income‑focused investors (listed or private).
• However, REIT payouts are not all taxed the same way. Only the ordinary‑income portion that meets Section 199A rules qualifies for the 20% deduction.
• Other dividend categories—capital gain dividends and qualified dividends taxed at lower rates—do not qualify for the Section 199A deduction because they already get preferential tax treatment.

What counts as a “qualified REIT dividend” for Section 199A

A “qualified REIT dividend” generally means a dividend paid by a domestic REIT during the tax year that:

• Is not a capital gain dividend, and
• Is not a qualified dividend taxed at the reduced rates.

This is a simple definition with complex edges because whether a dividend qualifies can hinge on:

• How long an investor held the shares, and
• Whether the investor took actions that reduced the risk of loss during the holding period (such as hedging or offsetting trades).

Industry guidance and IRS instructions stress that not all REIT distributions are treated alike. Mistakes in classification or timing can cause taxpayers to lose the deduction.

The critical holding period rule (common pitfall)

To claim the Section 199A deduction on a REIT payout, an investor must satisfy a precise holding period test tied to the dividend’s ex‑dividend date:

1. The investor must hold the shares for more than 45 days during a 91‑day period that starts 45 days before the ex‑dividend date.
2. Counting rules:
   • Include the day you sell the stock.
   • Exclude the day you buy the stock.
   • Exclude any days when your risk of loss was materially reduced (e.g., hedges or offsetting trades).

If you hold the shares 45 days or fewer during that 91‑day window, the dividend won’t count as a qualified REIT dividend for Section 199A and the 20% deduction will not apply.

Other disqualifying situations

• If you’re under an obligation to make related payments with respect to positions in substantially similar or related property (for example, through a short sale), the REIT dividend on those shares is excluded from Section 199A qualification.
• This prevents claiming the deduction while taking offsetting positions that neutralize economic exposure.

Reporting mechanics: Form 1099‑DIV and Box 5

REITs report Section 199A‑eligible dividends to shareholders on the annual Form 1099‑DIV. The key field:

• Box 5 — “Section 199A dividends”: the total amount the REIT designates as eligible for the deduction.

Important points:

• Box 5 may include amounts even when the REIT cannot confirm whether each shareholder met the holding period requirement.
• The onus is on investors and their tax preparers to verify holding periods and any risk‑reducing transactions around ex‑dividend dates.
• Keep trade confirmations and brokerage statements to verify dates whenever large payouts land late in the year.

For details on how these dividends appear on tax forms, see the IRS’s latest Instructions for Form 1099‑DIV.

Year‑end timing quirks

• Dividends declared in October–December but paid in January are treated as paid on December 31 of the prior year for reporting purposes.
• That rule often decides which tax year the dividend appears on a 1099‑DIV, which can shift the effective tax impact of the 20% Section 199A deduction—especially when taxpayers’ incomes change year to year.

How REIT managers handle classification

• REITs typically finalize dividend characterizations after year‑end and issue written notices—generally within 30 days of year‑end—identifying each dividend as ordinary income, qualified dividend, capital gain dividend, unrecaptured Section 1250 gain, or return of capital.
• That breakdown is essential for tax reporting (and appears on Form 1099‑DIV).
• Nevertheless, classification alone doesn’t determine eligibility for Section 199A; each shareholder’s holding period and trading behavior remain determinative.

Examples that illustrate the rules

Example 1 — Qualified timing:
– Retiree buys 1,000 shares 50 days before the ex‑dividend date, holds through the ex‑date, and sells 10 days later.
– Purchase day excluded; sale day included. No hedges.
– Result: Held > 45 days in the 91‑day window → dividend typically qualifies, and the retiree may apply the 20% deduction to the Box 5 amount (subject to other Section 199A income limits).

Example 2 — Missed holding period:
– Same retiree buys only 20 days before the ex‑dividend date and sells 10 days after.
– Holding within the 91‑day window is too short → the dividend would not qualify for the deduction, even if the REIT designated it in Box 5.

Example 3 — Q4 declaration paid in January:
– REIT declares a December 15 dividend payable January 15. For reporting, it’s treated as paid on December 31.
– A shareholder who sells January 5 still receives the prior year’s 1099‑DIV showing the dividend. They must still verify they met the holding period and didn’t have hedges that excluded days from the count.

Practical steps investors should take now

• Mark ex‑dividend dates and map the 91‑day window. Aim to exceed the 45‑day requirement by a comfortable margin.
• Avoid hedging or offsetting trades during the 91‑day window if you plan to claim Section 199A on REIT dividends.
• Review Box 5 on your 1099‑DIV and match it with your actual holding period—do not assume Box 5 equals eligibility for you personally.
• Watch for Q4 dividends paid in January; they count as paid on December 31 of the prior year and can affect which tax year is impacted.
• Keep complete records: brokerage statements, trade confirmations, and notes on any options or hedges.
• If uncertain, consult a preparer before year‑end so you can adjust trades and holding periods while there’s still time.

Why this matters for households and policy context

• The REIT framework enables investors to pool capital into large property portfolios—offices, apartments, warehouses, data centers—without entity‑level tax, via Section 856 and the 90% distribution rule.
• Section 199A adds value by allowing a 20% deduction on that slice of REIT ordinary income that meets the holding period test.
• Supporters argue the deduction helps balance pass‑through taxation; critics see it as adding complexity and potential distortions.
• As of mid‑2025, the practical rules—definitions of qualified REIT dividends, the 45‑day holding test inside a 91‑day window, and reporting via Box 5—remain in force. Congress has not enacted changes for 2025, but Section 199A is scheduled to sunset after 2025 unless extended.

Additional considerations and common situations

• Different REIT sectors (data center, residential, retail) follow the same tax and reporting rules, though payouts and the mix of ordinary vs. capital gain distributions vary.
• Late‑year buyers/sellers may straddle tax years and must combine days across years to meet the 45‑day test.
• REITs may include Box 5 amounts even if they can’t confirm each shareholder’s holding period—so your personal records matter.
• A conservative approach is to treat 45 days as a minimum floor and build a cushion so hedged days or counting quirks don’t disqualify you.

Policy status and reporting rules (summary)

• Section 199A continues to allow a 20% deduction on qualified REIT dividends for the 2025 tax year, with no newly enacted changes announced as of September 7, 2025.
• A “qualified REIT dividend” excludes capital gain dividends and any dividend taxed as a qualified dividend at reduced rates.
• The holding period test: more than 45 days held during the 91‑day window that starts 45 days before the ex‑dividend date; exclude acquisition day and days with reduced risk of loss.
• Dividends tied to obligations to make related payments (e.g., short sales) are not qualified.
• Reporting uses Form 1099‑DIV, Box 5; investors must verify personal eligibility.
• Q4 dividends paid in January are treated as paid on December 31 of the prior year. See the IRS Instructions for Form 1099‑DIV.

Final takeaways

• The 20% deduction under Section 199A is real and can produce meaningful tax savings, but it’s not automatic. Eligibility hinges on facts within the investor’s control—primarily the holding period and absence of risk‑reducing trades.
• Documentation pays: log buys/sells around ex‑dividend dates, note any hedges, consolidate records across brokerages, and reconcile Box 5 to your holdings.
• If you rely on REIT income, consider discussing trades and timing with a tax preparer before year‑end to preserve eligibility rather than trying to fix issues during tax filing.
• Watch Washington: if Congress extends or alters Section 199A beyond 2025, the landscape could change; for now, treat the rules as stable but time‑sensitive.

Key point: Plan around ex‑dividend dates, meet the 45‑day test inside the 91‑day window, avoid hedges that reduce risk during that period, and verify Box 5 against your own records to secure the 20% Section 199A benefit.