Section 897 Ordinary Dividends: Where to Report on Your Tax Return

Dividends can be a key source of income for investors, but certain types require specific tax reporting. Section 897 ordinary dividends primarily affect taxpayers receiving distributions from U.S. real property interests held by foreign corporations or real estate investment trusts (REITs). Properly identifying and reporting these amounts ensures compliance with IRS regulations.

Section 897 Ordinary Dividends Classification

Dividends under Section 897 come from U.S. real property interests (USRPI) and receive distinct tax treatment when distributed by REITs or foreign corporations with significant U.S. real estate holdings. These dividends are taxed as ordinary income for U.S. taxpayers, meaning they do not qualify for lower capital gains rates and are instead subject to marginal tax rates ranging from 10% to 37% in 2024.

For non-U.S. investors, Section 897 dividends are considered effectively connected income (ECI) and taxed at the same rates as U.S. residents rather than the standard 30% withholding rate for most U.S. dividends. If the payer is a REIT, a 21% withholding tax applies under the Foreign Investment in Real Property Tax Act (FIRPTA).

1099-DIV Boxes for Section 897 Amounts

Section 897 dividends appear on Form 1099-DIV, which categorizes dividend income. Box 1a reports total ordinary dividends, including Section 897 amounts. Box 2e identifies Section 897 capital gain distributions, which are subject to FIRPTA withholding if they result from the sale of U.S. real property.

For foreign investors, Box 7 shows foreign tax paid, relevant if withholding applies. Box 10 reports nondividend distributions, which may represent returns of capital rather than taxable income. Understanding these classifications helps determine the correct tax treatment of REIT dividends.

Reporting on Individual Tax Returns

Section 897 ordinary dividends must be reported accurately to avoid IRS scrutiny. These amounts are included in total dividend income on Form 1040 and listed on Schedule B if total dividends exceed $1,500. Since they are taxed as ordinary income, they do not qualify for lower capital gains tax rates.

REIT distributions may include ordinary income, capital gains, and return of capital, so verifying each component is essential. Capital gain distributions from U.S. real property sales must be reported separately on Schedule D and Form 8949.

Higher dividend income can also impact tax liabilities. The Net Investment Income Tax (NIIT) applies a 3.8% additional tax to investment income for individuals with modified adjusted gross income exceeding $200,000 ($250,000 for married couples filing jointly). Section 897 dividends do not qualify as qualified REIT dividends under the Section 199A Qualified Business Income (QBI) deduction, limiting tax benefits.

Adjustments for Non-U.S. Filers

Foreign investors receiving Section 897 dividends may need to file a U.S. tax return, even if taxes were withheld at the source. Nonresident aliens and foreign corporations typically file Form 1040-NR or Form 1120-F to reconcile tax liabilities and claim refunds for over-withheld amounts.

Tax treaties generally do not override FIRPTA withholding on Section 897 distributions but may provide relief for other investment income. Investors should review IRS Publication 901 to determine eligibility for reduced tax rates. Proper documentation, such as Form W-8BEN or W-8BEN-E, must be submitted to claim treaty benefits.

Documentation Requirements

Maintaining accurate records is crucial for compliance with IRS regulations. Taxpayers should retain all relevant tax forms, broker statements, and supporting documents for at least three years in case of an audit.

Foreign investors must submit Form W-8BEN or W-8BEN-E to certify foreign status and claim treaty benefits. These forms typically require updates every three years. Foreign entities receiving Section 897 dividends may also need to provide Form W-8ECI if electing to treat these amounts as effectively connected income, allowing for deductions against taxable income. Failing to provide the correct documentation can result in higher withholding taxes and compliance issues.