Publicly Traded REITs: How They Work, Taxes and Examples

A publicly traded real estate investment trust (REIT) is a company that owns income-producing real estate, trades on a major stock exchange and is required by law to distribute at least 90% of its taxable income to shareholders as dividends. Unlike private REITs or non-traded REITs, publicly traded REITs offer daily liquidity, price transparency and SEC oversight. The tax treatment is also different than that of most stocks. The majority of REIT dividends are classified as ordinary income rather than qualified dividends, which makes account placement and tax planning an important part of any REIT investment strategy.

A financial advisor can help you evaluate whether publicly traded REITs are a good fit for your portfolio and offer guidance on how to structure them for tax efficiency.

How Publicly Traded REITs Work

A REIT is a company that pools investor capital to own, operate or finance income-producing real estate. Congress created the REIT structure in 1960 to give individual investors access to large-scale real estate portfolios the same way they invest in other industries, through publicly traded shares. ¹

To qualify as a REIT under IRS rules, a company must meet all of the following tests each year:

• Invest at least 75% of total assets in real estate, cash or U.S. Treasuries.
• Derive at least 75% of gross income from real estate-related sources, such as rents or mortgage interest.
• Distribute at least 90%-95% of taxable income to shareholders annually as dividends. ²
• Have at least 100 shareholders after its first year of existence.
• Have no more than 50% of shares held by five or fewer individuals, known as the 5/50 rule.

Publicly traded REITs are listed on major exchanges. Investors can buy and sell their shares like stocks during market hours. Professional real estate operators manage publicly traded REITs. This gives investors exposure to institutional-quality properties without the capital requirements or management burden of direct ownership.

There are three structural types of REITs:

• Equity REITs own and operate physical properties, generating most of their revenue from rents. They are by far the most common type and the most widely held by individual investors.
• Mortgage REITs (mREITs) own real estate loans and mortgage-backed securities, earning income from the spread between their borrowing costs and the yields on those instruments.
• Hybrid REITs do both, operating physical properties as well as owning real estate loans and mortgage-backed securities.

Types of Publicly Traded REITs and Sector Examples

Publicly traded REITs span a wide range of property types. The sector determines the revenue drivers, lease structures, interest rate sensitivity and growth outlook.

The table below maps major REIT sectors to representative examples:

Cell towers and data centers are a common source of confusion because they do not resemble traditional real estate. Both qualify as REITs because the IRS treats the physical infrastructure (towers, data center buildings) as real property for REIT qualification purposes. The underlying economics are lease-driven and long-term, consistent with the REIT model.

Mortgage REITs have a fundamentally different risk profile than equity REITs. As such, investors should evaluate them separately. Because mREITs borrow short-term and invest in longer-duration mortgage assets, they are highly sensitive to interest rate movements. Dividend cuts are common during rising rate environments (Annaly and AGNC both reduced dividends significantly during the 2022 ³ to 2023 ⁴ rate cycle). Yield alone is not a sufficient reason to own an mREIT.

How Publicly Traded REITs Are Taxed

REIT tax treatment is the most consequential and commonly misunderstood aspect of owning REITs. Unlike most stock dividends, the majority of REIT dividends do not qualify for the 15% or 20% qualified dividend rate. Understanding how REIT distributions are classified, and how the 20% pass-through deduction interacts with them, is key when it comes to after-tax return calculations.

REIT Dividend Categories for Taxation

There are three different categories of REIT dividends:

• Ordinary income dividends: Th is the largest portion for most REITs. Taxes apply at the investor’s ordinary income rate, which can be as high as 37%, not at the preferential 15% or 20% qualified dividend rate.
• Return of capital (ROC): This is the portion of a dividend that represents a return of the investor’s own principal. It is not taxed in the year it is received, but it reduces the investor’s cost basis in the shares. When an investor eventually sells the shares, the lower cost basis results in a larger capital gain. Investors must track ROC distributions carefully because most brokers do not adjust cost basis automatically.
• Capital gain distributions: Long-term capital gains rates of 0%, 15% or 20%, depending on income, apply to capital gain distributions. They are less common than ordinary income dividends.

Investors report all three categories on Form 1099-DIV: ordinary dividends in Box 1a, capital gains in Box 2a and return of capital in Box 3.

REIT ordinary dividends qualify for a 20% pass-through deduction under IRC Section 199A. ⁵ This deduction meaningfully reduces the effective tax rate on REIT dividends for most investors. The math for the highest marginal bracket—37% top rate multiplied by 80% (after the 20% deduction)—equals an effective rate of 29.6% on REIT ordinary dividends.

Determining the Tax Treatment of REIT Distributions

REIT distributions often contain a mix of ordinary income, capital gain distributions and return of capital. Investors should review Form 1099-DIV each year to determine the tax treatment of their specific distributions. 

Investors with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly) owe an additional 3.8% net investment income tax (NIIT) on REIT dividends and capital gains. ⁶ Before the Section 199A deduction, the effective top rate on REIT ordinary income for high earners is 40.8%.

When it comes to placing these investments in an account, take the following into consideration:

• Roth IRA: A Roth IRA is often the most tax-efficient location for REITs. Dividends compound tax-free, and investors owe no tax upon withdrawal. This eliminates the ordinary income problem entirely.
• Traditional IRA or 401(k): These accounts allow investors to defer ordinary income tax until withdrawal. They are effective for those who expect to be in a lower bracket in retirement.
• Taxable brokerage account: This is the least efficient option for high-income investors due to ordinary income treatment of dividends. The Section 199A deduction partially mitigates the disadvantage but does not eliminate it.

How to Evaluate Publicly Traded REITs

Standard equity valuation metrics are unreliable for REITs. Large, non-cash depreciation charges that reduce GAAP net income well below actual economic performance distort metrics like price-to-earnings ratio. REIT analysts instead use a distinct set of metrics designed to account for the real estate depreciation dynamic.

FFO is the most widely reported REIT earnings metric. Most publicly traded REITs disclose it in their quarterly earnings releases. AFFO is a more conservative and accurate measure of how much cash is genuinely available to pay dividends after accounting for the capital expenditures necessary to maintain properties. Comparing dividend payments to AFFO, rather than to reported net income, offers a more reliable picture of payout sustainability.

NAV analysis adds another layer. When a REIT trades at a significant discount to estimated NAV, it can signal either a buying opportunity or a market concern about the quality of the underlying assets. When it trades at a premium, the market is pricing in management’s ability to deploy capital above the value of existing properties.

Interest rate sensitivity is a qualitative factor that applies across all REIT types, though to varying degrees. Rising interest rates make REIT dividend yields less competitive relative to risk-free alternatives like Treasuries, which tends to pressure share prices. The 2022 to 2023 rate cycle produced significant declines across most REIT sectors. Equity REITs with long-term leases and high-credit tenants tend to be more resilient than mREITs, whose earnings are directly tied to the spread between short-term borrowing costs and mortgage yields.

Publicly Traded REITs vs. Non-Traded REITs vs. Real Estate ETFs

Investors have three primary ways to access real estate through the capital markets: individual publicly traded REITs, non-traded REITs and real estate ETFs or index funds. The differences in liquidity, cost, transparency and risk are substantial.

Non-traded REITs have attracted significant investor assets in part because their valuations are smoothed. Because they do not reflect daily market pricing, this can create the appearance of lower volatility. Critics, however, argue that this masks, rather than eliminates, true volatility.

This risk became apparent in 2022 and 2023 when both Blackstone’s BREIT and Starwood’s SREIT faced redemption requests that exceeded their monthly limits, forcing them to restrict investor withdrawals. Investors who assumed they could access their capital found they could not. Liquidity restrictions of this kind are a structural feature of non-traded REITs, not an exceptional event.

Real estate ETFs, such as the Vanguard Real Estate ETF (VNQ, expense ratio 0.13%), the Schwab U.S. REIT ETF (SCHH) and the iShares U.S. Real Estate ETF (IYR), provide instant diversification across dozens of publicly traded REITs at minimal cost. The tax treatment of dividends received through a REIT ETF is identical to owning individual REITs, where the underlying dividend income retains its ordinary income character when passed through to ETF shareholders. For investors who prefer passive exposure to real estate without the research burden of selecting individual REITs, a low-cost REIT ETF held inside a Roth IRA is often the most straightforward approach.

Choosing Between REITs

When it comes to deciding which type of REIT may be in line with your goals and risk tolerance, consider the following: 

• If you need daily liquidity: A publicly traded REIT or REIT ETF may be appropriate.
• If you want broad diversification with minimal research: Consider an REIT ETF, such as VNQ or SCHH.
• If you’re comfortable with individual company analysis: Look into individual publicly traded REITs selected by sector, FFO valuation and AFFO payout ratio.
• If you’re an accredited investor seeking less market-correlated returns and willing to accept illiquidity: Non-traded REIT can make sense. Just ensure you have full awareness of fee structure, redemption restrictions and the historical record of programs like BREIT and SREIT.
• If you’re a tax-sensitive investor at any income level: In this case, consider holding any REIT structure inside a Roth IRA when possible. This will allow you to eliminate ordinary income tax on dividends.

Bottom Line

Publicly traded REITs offer access to institutional-quality real estate through stock exchange shares with daily liquidity and SEC oversight. The 90% distribution requirement generates high dividend yields, though those dividends are generally taxed as ordinary income rather than at the lower qualified dividend rate. Evaluating REITs requires REIT-specific metrics such as FFO, AFFO and NAV analysis, which give a more accurate picture of earnings and property values than standard net income figures. For investors who prefer simplicity, a low-cost REIT ETF provides diversified real estate exposure at minimal cost with the same tax treatment as individual REIT ownership.

Investment Planning Tips

• A financial advisor can help you determine how REITs and other investments fit into your broader portfolio and tax strategy. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If publicly traded REITs have you thinking about broadening your investment mix, here’s a roundup of 13 investments to consider.

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