Tax Form

• If you own shares of a REIT, the company operating the REIT will issue you a 1099-DIV at the end of the tax year. The 1099-DIV will state the amount of dividends that you earned during the year. The 1099-DIV will also specify which parts of the dividend payment for the year are ordinary income, capital gains and return of income. You will need to report these amounts on your tax return and keep the 1099-DIV as a tax record for the current tax year as well as future tax years.
  
  

Ordinary Income

• Part of the dividend payment you receive from a REIT is ordinary income. This means that you will pay your standard income tax rate on that portion of the REIT dividend instead of paying capital gains taxes as you would with standard stock shares. As the maximum tax rate on capital gains is 15 percent as of the 2010 tax year, you may pay a higher percentage on this portion of your profit depending on your personal tax rate. Generally, a majority of the dividend you receive from a REIT is subject to income taxes.
  
  

Capital Gains

• When a REIT pays you a dividend as a result of selling assets at a profit, this dividend is subject to taxation as a capital gain. In most tax circumstances there are two types of capital gains: long-term and short-term capital gains. This refers to the amount of time you held the asset before selling, with a long-term gain indicating you held the asset for more than a year. However, in the case of a capital gain dividend from a REIT, the IRS treats all capital gains as long-term capital gains.
  
  

Return of Capital

• When selling shares of a REIT, you will report any profit you receive from the sale as capital gain. However, it is more difficult to determine the cost basis (purchase price) of a REIT compared to common stock. With common stock, the price that you pay for the stock is the cost basis. With shares of a REIT, you determine the cost basis by subtracting any return of capital from the purchase price. For example, if you paid $20 for a share of the REIT and received $5 in return of capital, your cost basis for the share would be $15.