What Is a Consent Dividend for a REIT?

A consent dividend is a financial tool a Real Estate Investment Trust (REIT) uses to manage its tax obligations. It is a hypothetical, or “deemed,” dividend that is not paid out in cash to shareholders. Instead, shareholders agree to include the dividend amount in their taxable income as if they had received it. This mechanism allows the REIT to claim a dividends paid deduction to meet its annual income distribution requirements without depleting cash reserves needed for operations or investments.

The REIT Distribution Requirement

A REIT’s tax structure requires it to distribute a portion of its earnings to shareholders annually. A REIT must distribute at least 90% of its taxable income to its shareholders. This rule allows the REIT to deduct the dividends it pays, avoiding corporate-level income tax on its distributed profits. Most REITs aim to distribute 100% of their taxable income to eliminate their corporate tax liability entirely.

This distribution requirement can create challenges. A REIT might have high taxable income but lack the available cash to make the necessary distributions. This situation can arise from non-cash income sources, such as accrued interest or rent, or when capital expenditures for property acquisitions consume cash.

In such scenarios, a consent dividend becomes a solution. It allows the REIT to get credit for a dividend payment for tax purposes, meeting the 90% distribution threshold without an actual cash outflow. The process treats the dividend as being paid to shareholders and then immediately reinvested back into the REIT as a contribution to capital.

Required Forms and Shareholder Consent

The consent dividend process is formalized through IRS Form 972 and Form 973. Form 972, “Consent of Shareholder to Include Specific Amount in Gross Income,” is prepared by the REIT for each participating shareholder. It details the specific amount of the deemed dividend, the class of stock, and the number of shares owned. The shareholder must sign this form, agreeing to report this non-cash distribution as taxable dividend income.

Only shareholders who own “consent stock” on the last day of the REIT’s taxable year are eligible. Consent stock is common stock, but not preferred stock that has dividend preferences. The consent dividend must be distributed pro-rata among all shareholders of the same class of stock to avoid being classified as a “preferential dividend,” which would disqualify the distribution from the dividends paid deduction. If any shareholder in a stock class does not sign Form 972, the consent dividend for that entire class may be invalidated.

Once the REIT collects the signed Form 972s, it prepares Form 973, “Corporation Claim for Deduction for Consent Dividends.” On this form, the REIT aggregates the total amount of the consent dividends and provides details about its outstanding stock and dividend rights. Because obtaining unanimous consent can be difficult, this strategy is most practical for private REITs with a small, concentrated group of shareholders.

The Filing Process and Tax Reporting

The filing process follows a clear sequence. Each consenting shareholder must sign and return their completed Form 972 to the REIT before the due date of the REIT’s corporate income tax return, including any extensions. The REIT is responsible for gathering all the executed Form 972s, attaching them to its completed Form 973, and retaining the original signed forms in its records. This entire package is then filed along with the REIT’s annual tax return, Form 1120-REIT.

The final step involves tax reporting. The shareholder who signed Form 972 must report the consent dividend amount as dividend income on their personal income tax return for that year. Concurrently, the shareholder increases their cost basis in the REIT’s stock by the same amount. This basis increase will reduce the taxable capital gain or increase the capital loss when the shareholder eventually sells their shares.