REIT Qualification Tests, Distributions and Form 1099-DIV
The asset, income, ownership and distribution tests a real estate investment trust must pass, the tax on what it keeps and the 4% excise, how dividends read on Form 1099-DIV, and the ways to pay less.
A real estate investment trust pays no corporate tax on what it distributes, as long as it keeps passing its tests. The plan tests each REIT on the figures you enter and gives every test one of four answers: Passes, Passes barely (within two points), Fails (with the shortfall in dollars) or Not enough figures — which is never a pass.
The tests
| Test | The rule | The law |
|---|---|---|
| Real estate assets | At least 75% of assets in real estate, cash and government securities, at the close of each quarter. | 26 U.S.C. § 856 |
| Other securities | No more than 25% in other securities. | 26 U.S.C. § 856 |
| Taxable REIT subsidiaries | No more than 25% from 2026 (20% before). | Public Law 119-21 (H.R. 1, 119th Congress), 26 U.S.C. § 856 |
| One issuer | No more than 5% of assets in one issuer’s securities. | 26 U.S.C. § 856 |
| 75% income | At least 75% of gross income from real property — rents, mortgage interest, gains, other REITs’ dividends. | 26 U.S.C. § 856 |
| 95% income | At least 95% from those sources plus other dividends and interest. | 26 U.S.C. § 856 |
| Tenant services | Services tenants do not usually get kept under 1% of a property’s income, or all its rent stops qualifying. | 26 U.S.C. § 856 |
| 100 shareholders | At least 100 shareholders — not in the first REIT year. | 26 U.S.C. § 856 |
| Closely held | Five or fewer individuals own no more than 50% — not in the first REIT year. | 26 U.S.C. § 856, 26 U.S.C. § 542 |
Distributions
A REIT must distribute at least 90% of its taxable income before the dividends-paid deduction, excluding net capital gain. What it keeps is taxed at 21%; distributing too little within the calendar year adds a 4% excise; and a sale of property held for sale to customers is taxed at 100% (IRC §857(a)(1), (b)(1)-(b)(3), (b)(6); §858; §4981 — 26 U.S.C. § 857, 26 U.S.C. § 858, 26 U.S.C. § 4981).
On shareholders’ Forms 1099-DIV
The plan shows how the year’s distributions read on Form 1099-DIV: ordinary dividends (box 1a), the qualified part (1b), capital gain distributions (2a) with unrecaptured §1250 gain (2b), return of capital (3) and the §199A dividends shareholders deduct 20% of (5) (IRC §857(b)(3)(B), (c); §199A(b)(1)(B), (e)(3); §301(c) — 26 U.S.C. § 857, 26 U.S.C. § 199A, 26 U.S.C. § 301).
Ways to pay less
| Lever | What it does | The law |
|---|---|---|
| Spillback dividend | A dividend declared before the return is due counts for the year, closing a shortfall. | 26 U.S.C. § 858, 26 U.S.C. § 860 |
| Consent dividend | A private REIT’s shareholders agree to be taxed on an amount not paid. | 26 U.S.C. § 565 |
| Calendar-year distribution | Distributing enough in the calendar year avoids the 4% excise. | 26 U.S.C. § 4981 |
| Retained capital gain | Designated to shareholders, who get a credit for the tax paid. | 26 U.S.C. § 857 |
| A taxable REIT subsidiary | Moves tenant services that would taint rent into a TRS. | 26 U.S.C. § 856 |
| Foreclosure property | An election keeps income from foreclosed property qualifying. | 26 U.S.C. § 856, 26 U.S.C. § 857 |
| Cure provisions | A small asset test failure cured within six months does not end the election. | 26 U.S.C. § 856 |
| The prohibited-transactions safe harbor | Sales that meet its holding and expenditure tests are not dealer sales. | 26 U.S.C. § 857 |
Seayora makes no REIT election and files no Form 1120-REIT. A REIT also files state returns where it does business; those are not computed. New York taxes a qualifying transfer of property to a REIT at half the rate — see State and local tax rules.
Related guides
- Tax Planning for Owners, Trusts and REITs: Lower the Tax on Your Rentals
- Tax Depreciation and Cost Segregation for Rental Property
- Rental Losses, Real Estate Professionals and Short-Term Rentals
- Trusts and Estates That Own Rental Property: Form 1041 and Distributions
- State and Local Tax Rules for Rental Owners: Bonus Add-Backs, Nonresident Returns, PTET and Transfer Taxes
- Every Law the Tax Planner Cites, With Links
Related features and guides
- Tax Planning for Owners, Trusts and REITs: Lower the Tax on Your Rentals — Documentation. Every lawful way to lower the federal tax on your rentals, measured against your own records — plus tax depreciation and cost segregation, trusts’ Form 1041 and distributions, REIT qualification tests, and the state and city rules where you live and own.
- Tax Depreciation and Cost Segregation for Rental Property — Documentation. How Seayora depreciates each kind of rental property — 27.5 and 39 years, 5, 7 and 15 years — bonus depreciation by purchase date, catching up missed depreciation on Form 3115, and what a sale recaptures.
- Rental Losses, Real Estate Professionals and Short-Term Rentals — Documentation. When a rental loss offsets your other income: the $25,000 allowance and its phase-out, real estate professional status, the short-term rental rule, the seven material participation tests and the 3.8% net investment income tax.
- Property Management Accounting — Feature. A full chart of accounts and general ledger purpose-built for rentals — income and expenses tracked to the unit, with rent, fees, and maintenance posting automatically.
- Deducting Rental Losses: The $25,000 Allowance and Its Phaseout — Guide. When a rental loss can offset wages: the $25,000 allowance for active participation, the $100,000–$150,000 phaseout and the real estate professional test.
- The QBI Deduction for Rental Property: The 250-Hour Safe Harbor — Guide. When rental income counts for the 20% qualified business income deduction, and the IRS safe harbor: separate books, 250 hours of rental services and a time log.