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The 20% Pass-Through (Section 199A) Deduction

A 2017 tax law lets many investors deduct up to 20% of their qualified REIT dividends before tax is applied each year

Where this deduction comes from

The Tax Cuts and Jobs Act of 2017 created a deduction for "qualified business income" earned through pass-through businesses such as sole proprietorships, partnerships, and S-corporations. As part of that law, Congress extended a version of the same benefit to REIT shareholders, even though buying REIT shares doesn't make you a business owner or require any active involvement in a trade or business. The provision lives in Section 199A of the tax code and is often shorthanded as the "QBI deduction" or the "20% REIT deduction."

What it actually does

If you hold REIT shares directly, the ordinary-income portion of your REIT dividends — the "qualified REIT dividends" — can qualify for a deduction of up to 20%. In effect, tax is calculated on roughly 80% of that income rather than 100% of it. This applies whether or not you itemize deductions, and it doesn't require you to run a business or clear the income-level tests that apply to some other parts of the broader QBI deduction.

As a simple illustration: if you received $1,000 in qualified REIT dividends for the year, the deduction can reduce the amount actually subject to tax to roughly $800, before your ordinary tax rate is applied to what remains. The dollar value of the savings scales with your tax bracket, since the deduction removes income from taxation rather than applying a flat credit.

For an investor in a higher tax bracket, the dollar value of this deduction is larger than for someone in a lower bracket, simply because a fifth of the income is being shielded from a higher marginal rate rather than a lower one. It's worth being precise about scope: the 20% figure applies to the qualified REIT dividend portion of a distribution specifically. It generally doesn't apply to the return-of-capital piece, which isn't taxed as income in the first place, or to capital gain distributions, which are already taxed at capital gains rates. See How REIT Dividends Are Taxed for how those pieces fit together.

How you'll see it reported

Brokers report qualified REIT dividends in a specific box on Form 1099-DIV, commonly labeled "Section 199A dividends." From there, the deduction is generally calculated on IRS Form 8995 or 8995-A when you file. Most consumer tax software handles this calculation automatically once you enter your 1099-DIV correctly, without requiring you to track down the underlying form yourself. Walk through the rest of the form in Reading Your 1099-DIV.

REIT funds and ETFs

REIT mutual funds and REIT ETFs can generally pass this same character of income through to their own shareholders, so the deduction isn't limited to owning individual REIT stocks directly. A fund that holds a basket of REITs typically reports its own Section 199A dividend amount on its shareholders' 1099-DIVs, aggregating the underlying REITs' qualified dividends into one figure. Compare the two approaches in REIT ETFs versus individual REITs.

Why this matters in the bigger tax picture

Combined with the fact that REITs already avoid paying corporate income tax on the income they distribute (see Why REITs Avoid Corporate Tax), the Section 199A deduction is one more reason REIT income gets discussed differently from an ordinary corporate dividend. It doesn't make REIT income tax-free, and it doesn't make REITs automatically better or worse than any other kind of income — it's simply a specific mechanical adjustment written into current law that happens to apply to this asset class. This deduction is sometimes cited as a reason REITs can be more tax-efficient than they first appear, though "more tax-efficient" is relative — the ordinary-income character of the remaining 80% is still real, and is still generally taxed at a higher rate than a qualified dividend or a long-term capital gain would be.

The fine print — this can change

Section 199A was passed with an expiration date attached, and Congress has adjusted, extended, and modified similar provisions before, sometimes with little advance notice. Whether this specific deduction remains in place, at 20% or some other figure, is a matter of future legislation, not something this site can predict. See the glossary for a quick definition of "qualified REIT dividend." Treat any tax planning based on this deduction as provisional, and consult a tax professional for how it applies to your own return, especially if you're comparing REITs against other income-generating investments.

See it in the data: Screen REITs by yield → Glossary →

Research and education only — nothing here is investment advice. Figures such as the 90% distribution rule are general and can change; always confirm against a company's filings.