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Are dividends paid by an ETF that invests in REITs taxed at the "qualified" dividend rate (typically, 15% vs. the ordinary income tax rate)?

(If I recall correctly, REITs are not subject to double taxation, so I don't think the favorable dividend tax treatment applies to them, but I may be wrong.)

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  • Could the question be edited for clarity? There is (I think) a double negative in the second sentence.
    – Greg
    Jun 30, 2011 at 13:37

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They aren't qualified, because the REIT is a special kind of company, and not double-taxed like a regular corporation (as you mention). The income from the real estate holdings gets passed straight through, similar to how a mutual fund passes any interest or capital gains it earns straight through to shareholders.

To avoid the double tax the REIT has to agree to distribute 90% of its income to shareholders, rather than keeping it inside the company. That ensures that while the taxation is only "single," it doesn't get deferred indefinitely into the future. For a normal corporation, paying a dividend is optional and can be put off forever if desired.

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In most cases REITs don't pay dividends, they pay distributions which are treated differently.

Here's a REIT Tax-Equivalent Distribution Calculator: http://www.dinkytown.net/java/REITTaxEquivYield.html

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Probably not to any appreciable extent, if Vanguard's REIT fund is any indication:

https://personal.vanguard.com/us/insights/taxcenter/qdi/yearend-qualified-dividend-income-2010

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