REITs in Retirement: How They Pay, How They're Taxed, and What to Weigh

Eli Howard, CEO, E. H. Howard Wealth Management

Every so often someone sits down across the table with a statement in hand and a question about the REIT on it. Sometimes they bought it years ago. Sometimes a friend swears by them. Sometimes a salesperson just pitched one with a yield that looked better than anything else on the page. The question is almost always the same: does this belong in my retirement plan?

There's no single answer, but there are a few things worth understanding before you decide. Here's how REITs work, how the income gets taxed, and where retirees tend to get tripped up.

What a REIT actually is

A real estate investment trust, or REIT, is a company that owns and usually operates income-producing real estate such as apartments, warehouses, office buildings, hotels, and self-storage, or that holds mortgages and real estate loans (SEC). Owning shares lets you collect a slice of that income without buying a building yourself or taking a 2 a.m. call about a broken water heater.

To keep their special tax status, REITs must pay out at least 90 percent of their taxable income to shareholders each year (RSM). That rule is a big reason REITs are associated with income, and why some may offer higher dividend yields than other investments (SEC). A higher yield is not the same thing as a safer one, though. If the properties earn less, the payout can shrink.

The ways retirees usually own them

Most people hold REITs in one of three ways: shares of a publicly traded REIT bought through a broker, a REIT mutual fund or ETF, or a non-traded REIT sold through a broker or adviser during its offering (SEC). The SEC calls the difference between traded and non-traded one of the most important distinctions among REITs, and we agree. More on that below.

How REIT income is taxed

This is the part that surprises people. Many stock dividends qualify for the lower qualified dividend tax rates. REIT dividends generally don't. They're taxed as ordinary income, the same way your pension or IRA withdrawals are (SEC).

There is a partial offset. Under Section 199A, eligible taxpayers may deduct up to 20 percent of qualified REIT dividends. That deduction was scheduled to expire after 2025, but the One Big Beautiful Bill Act, signed July 4, 2025, made it permanent at the 20 percent rate (DLA Piper). On your Form 1099-DIV, the qualifying amount shows up in Box 5, and shares held 45 days or less around the ex-dividend date generally don't count (IRS).

You may also see an amount in Box 3, labeled nondividend distributions (IRS). Those are handled differently from ordinary dividends, so ask your tax preparer how they affect your cost basis before treating the whole check as income.

Where you hold them changes the math

Inside a traditional IRA, REIT dividends aren't taxed in the year they're paid. The tradeoff is that the money eventually comes out as ordinary income, and the 199A deduction doesn't apply to IRA withdrawals. In a taxable brokerage account, you pay tax each year but may be able to use the deduction. A Roth IRA changes the picture again.

Which one fits depends on your bracket today, your bracket later, your required minimum distributions, and where the rest of your income comes from. It's a planning question, not a rule of thumb, and it's a regular part of how we approach tax planning for retirees.

Non-traded REITs deserve extra caution

Non-traded REITs are registered with the SEC but don't trade on an exchange, and that creates risks the publicly traded kind don't carry. The SEC points to several (SEC):

• They're illiquid. If you need the money quickly, you may not be able to sell.
• Their value is hard to see. Many don't publish an estimated value per share until 18 months after the offering closes.
• Distributions may be paid from offering proceeds and borrowed money, not just property income, which reduces the value of the shares.
• Sales commissions and upfront offering fees usually total about 9 to 10 percent of the investment.
• An outside manager may earn fees tied to buying more property, which doesn't always line up with what's best for shareholders.

None of that makes a non-traded REIT wrong for everyone. It does mean a retiree who may need access to the money should ask hard questions before signing anything. As an independent fiduciary, we owe our clients advice in their best interest, and that starts with walking through the costs and the exit before the yield.

Count the real estate you already own

Before adding REITs, take stock of how much of your net worth is already tied to real estate. In West Texas that list can run long: the house, a rental or two, some acreage outside town, maybe mineral interests passed down from a parent. If most of your wealth already rides on property values and the local economy, adding more real estate may not diversify you as much as it seems. Looking at the whole picture, not just the brokerage statement, is where wealth preservation planning starts. And if that land or those minerals are headed to the kids someday, it's worth an estate planning conversation too.

Prices and payouts move

Publicly traded REITs trade like stocks, so their prices rise and fall every day, sometimes sharply. Because real estate runs on borrowed money, REITs can be sensitive to changes in interest rates and financing costs. And the dividend isn't a contract. If tenants leave or costs climb, a REIT can reduce or suspend its payout. An income plan that leans on REIT dividends to cover fixed bills needs a backup for the years when that check is smaller.

Questions to ask before adding REITs to your plan

1. What job is this supposed to do in my plan: income, growth, or diversification?
2. Can I sell it if I need the money next year?
3. What are the total costs, including anything paid up front?
4. Where is the distribution coming from: property income, borrowing, or my own principal coming back to me?
5. Which account should hold it, given my tax bracket and RMDs?
6. How much real estate do I already own outside my portfolio?
7. What happens to my income plan if the dividend is cut in half?

Frequently asked questions

Talk it through

If you're weighing whether real estate belongs in your retirement income, or someone has handed you a REIT pitch and you'd like a second set of eyes, we're glad to talk it through. Book a call with our team today.

E. H. Howard Wealth Management, LLC is an independent fiduciary firm. The information shared is for educational purposes only and does not constitute personalized financial, tax, legal, or investment advice. Past performance is not indicative of future results. All investments carry risk, including possible loss of principal. Consult your own qualified professional regarding your specific circumstances.

Sources

• SEC Investor.gov: Real Estate Investment Trusts (REITs)
• RSM US: What can you do if your REIT is under distributed?
• DLA Piper: One Big Beautiful Bill Act, top points for real estate and REITs (Jul 8, 2025)
• IRS: Instructions for Form 1099-DIV

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