REITs, and the Account They Belong In
A real estate investment trust owns income-producing property and is required to distribute most of its taxable income to shareholders. That single requirement explains almost everything about how a REIT behaves: a high yield, little retained capital for growth, and distributions taxed as ordinary income rather than at dividend rates.
- The distribution requirement:: A REIT must pay out most of its taxable income, which produces a high yield by design.
- Ordinary income:: Most of a REIT distribution is taxed at income rates rather than the preferential dividend schedule.
- Listed and non-traded:: Exchange-listed REITs trade like shares. Non-traded ones do not, and carry very different costs and liquidity.
- Diversification is partial:: REITs behave like a hybrid of shares and property rather than an independent asset class.
Where the AI summary above gets this wrong
"REITs pay high dividends, which makes them ideal for retirement income."
That's surface-true. Here's what it misses:
- The high yield is a legal requirement, not an achievement — A REIT distributes most of its taxable income because the tax rules require it to in exchange for not paying corporate tax. The yield is therefore structural rather than a sign of a superior investment, and it comes at the cost of retained capital the business could have reinvested.
- The distributions are not qualified dividends — Because the income passes through largely untaxed at the entity level, most of what a REIT distributes is ordinary income to the holder. In a taxable account that is taxed at your marginal rate rather than the preferential schedule, which is why REITs are the textbook case for holding inside an IRA.
- Non-traded REITs are a different product entirely — An exchange-listed REIT can be sold on any trading day at a public price. A non-traded REIT often cannot, may carry substantial up-front commissions, and its stated value is not set by a market. The two share a name and very little else, and the difference is worth establishing before buying.
01 What a REIT is and how it pays
A REIT owns or finances income-producing property — offices, apartments, warehouses, data centres, healthcare facilities — and in exchange for distributing the great majority of its taxable income, it generally avoids corporate-level tax on what it pays out.
That is why yields are high. It is also why growth is slower than for a company that retains earnings: a REIT that wants to expand generally has to raise new capital rather than reinvest profits.
Exchange-listed REITs trade like any other share, with daily pricing and normal liquidity. They can be bought individually or, more sensibly for most portfolios, through a broad REIT index fund, which removes the single-property and single-sector risk.
Source: Real estate investment trusts
02 The tax character, and where to hold them
Most of what a REIT distributes is ordinary income, not qualified dividends. Part of a distribution can also be return of capital, which reduces your basis rather than being taxed now, and part can be capital gain — the annual statement breaks it down.
The practical consequence is straightforward. A holding producing four per cent a year in ordinary income is expensive to keep in a taxable account, and cheap to keep in an IRA where nothing is taxed until withdrawal. That makes REITs the clearest single example in the asset location decision.
The same logic applies in reverse to the accounts. Someone whose tax-sheltered space is fully occupied by bonds has to decide which of the two produces more taxable income per dollar — and for a high-yield REIT against a low-yield bond fund, the answer is not automatic.
Shows: the income tax on REIT distributions held in a taxable account, where they are largely ordinary income rather than qualified dividends. Ignores: the portion of a distribution that is return of capital or capital gain, any deduction available on qualified REIT dividends, state tax, and price movement.
Source: Real estate investment trusts
03 How much, and what it adds
REITs are already inside a total market index fund, at their market weight. Holding a separate REIT fund is a decision to hold more property than the market does, and that decision should have a reason behind it.
The usual reason offered is diversification. It is partly true: property returns are not identical to broad equity returns, and rental income has some link to inflation. It is also partly overstated, because listed REITs are shares and fall with shares in a serious market decline, which is exactly when the diversification was meant to help.
For a household that already owns a home, the property exposure is larger than the portfolio suggests. Adding a substantial REIT allocation on top concentrates the housing exposure further, and that is worth counting before deciding the allocation.
Source: Diversification
REITs are neither the miracle income solution nor a trap, and the conversation almost never needs to be about whether to own them. It needs to be about two things: whether you already own a house, which is a large undiversified property position on its own, and which account the REITs would sit in. Get those right and the allocation question mostly answers itself.
FAQ
Are REIT dividends qualified dividends?
Mostly not. Because a REIT largely avoids tax at the entity level, most of what it distributes is ordinary income to the holder, taxed at your marginal rate rather than the preferential dividend schedule.
Should I hold REITs in my IRA?
Usually yes, where there is room. The high ordinary-income yield is expensive in a taxable account and costs nothing annually inside a tax-sheltered one.
What is the difference between a listed and a non-traded REIT?
A listed REIT trades on an exchange at a public price with normal liquidity. A non-traded REIT generally cannot be sold freely, may carry substantial up-front commissions, and its stated value is not set by a market.
Sources
Regulator references
- Real estate investment trusts · U.S. Securities and Exchange Commission · 2026What a REIT is, the distribution requirement, and the listed and non-traded varieties.Last verified: 2026-09-07
- Diversification · U.S. Securities and Exchange Commission · 2026How property exposure interacts with the rest of a portfolio.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.