Do REITs Issue a Schedule K-1 Tax Form?

A Real Estate Investment Trust (REIT) allows individuals to invest in a portfolio of income-producing real estate, similar to how mutual funds offer access to a basket of stocks. This structure provides a way to participate in the real estate market without directly buying and managing properties. For investors, a primary question concerns the annual tax documentation they will receive, which dictates how they report investment income to the IRS.

The Standard Tax Form for Publicly Traded REITs

For most investors in publicly traded REITs, the tax form received is Form 1099-DIV, “Dividends and Distributions,” not a Schedule K-1. The reason is that most REITs on major stock exchanges are structured as C-corporations for federal tax purposes. This corporate classification means the REIT is a distinct legal entity from its shareholders.

Because of this structure, the REIT reports payments to investors as distributions, much like any other publicly traded company paying dividends. This simplifies the tax reporting process for shareholders, as the REIT handles its own complex tax filings. The investor only needs to report the figures from the 1099-DIV.

Understanding REIT Distributions on Form 1099-DIV

The Form 1099-DIV an investor receives from a REIT provides a detailed breakdown of distributions paid during the year. The largest portion of these distributions is reported in Box 1a as ordinary dividends. Unlike qualified dividends from many standard corporations, most REIT dividends are non-qualified and are taxed at the investor’s regular income tax rate.

A tax benefit often applies to these dividends, as investors can take a Qualified Business Income (QBI) deduction of up to 20% on their ordinary REIT dividends. This deduction lowers the tax rate on this income. For an investor in the highest tax bracket, for example, the QBI deduction can reduce the effective federal tax rate on REIT dividends from 37% to 29.6%. This deduction is scheduled to expire after 2025 unless extended by new legislation.

Beyond ordinary dividends, the Form 1099-DIV details other types of distributions. A unique aspect of REITs is their ability to pass through capital gains from the sale of properties directly to shareholders. These are reported in Box 2a as capital gain distributions and are taxed at favorable long-term capital gains rates, regardless of how long the investor has held the REIT shares.

Another reporting item is the amount in Box 3, labeled “Nondividend Distributions.” This figure represents a return of capital, meaning the REIT is returning a portion of the investor’s original investment. These distributions are not taxed when received but instead reduce the investor’s cost basis, which increases the taxable capital gain realized when the investor eventually sells their shares.

Exceptions That Issue a Schedule K-1

While Form 1099-DIV is the standard for publicly traded REITs, certain real estate investments do issue a Schedule K-1. This form is used by pass-through entities, where profits, losses, and deductions are passed directly to the individual owners to report on their personal tax returns. Understanding this structural difference is key to knowing which tax form to expect.

One primary exception is a private REIT that is structured as a partnership rather than a corporation. In this arrangement, investors are considered partners and receive a Schedule K-1 detailing their specific share of the partnership’s financial activity for the year. This can include not just income but also losses and deductions, a significant difference from the distributions on a 1099-DIV.

Another instance involves entities known as Publicly Traded Partnerships (PTPs) that invest in real estate. Although they trade on public exchanges like REITs, their legal structure as a partnership mandates the use of Schedule K-1 for tax reporting. This is because these entities pass their income and deductions through to their partners. This can create a more complex tax situation, as the income may require filing in multiple states where the partnership operates.