What are Section 199A Dividends?
By: Jonathan Wolfgram,
What Are Section 199A Dividends?
Section 199A dividends refer to dividends paid out by real estate investment trusts (REITs) or funds holding REITs.
Similar to regular dividends, Section 199A dividends take some amount of capital from a company’s equity and redistribute it to shareholders based on the number of shares they possess. 199A dividends, however, are only paid out by REITs and funds holding REITs, and therefore receive special treatment in the world of tax law.
What Are Section 199A Dividends? They Began With the Tax Cuts and Jobs Act of 2017
The year is 2023, but the law surrounding Section 199A dividends began with the Tax Cuts and Jobs Act of 2017, or TCJA for short. It reduced the highest tax rate applicable to domestic C corporations. These corporations originally paid upwards of 35% of their taxable income to the federal government — following the passing of TCJA, these corporations had their tax rate dropped to a flat 21%.
To provide a similar advantage to non-corporate entities, Section 199A was passed. The new rule allows noncorporate taxpayers to deduct up to 20% from their combined qualified business income (QBI). Section 199A(b)(1)(B) added that qualified dividends from REITs would be deductible just the same as QBI.
What Are Section 199A Dividends? Investors Can Deduct Up to 20% of REIT Income
Meaning: investors could now deduct up to 20% off any income obtained from dividends paid by real estate investment trusts (REITs). The same deduction applies to dividends obtained from mutual funds, if a meaningful amount of the fund’s income came from dividends distributed by REITs.
Any dividends eligible for this deduction are colloquially referred to as Section 199A dividends.
What Are Section 199A Dividends? Income Must Be Reported on Form 8995 or 8995-A
Any dividend income received from real estate investment trusts or related mutual funds should be reported on Form 8995 or Form 8995-A. This lets the taxpayer reduce taxable income by 20% of the total income received from Section 199A dividends (Box 5).
What Are Section 199A Dividends? Investors Need to Be Aware of Ex-Dividend Dates
To qualify for deduction under Section 199A, however, investors must have held shares for a set period of time before the corresponding dividend’s ex-dividend date. The ex-dividend date is the date when a dividend’s value is taken out of the company’s net asset value — likewise, investors interested in obtaining a dividend distribution must already be in ownership of the shares before the ex-dividend date arrives.
For Section 199A dividends, shareholders must have kept shares for a minimum of 46 days during a 91-day window surrounding the ex-dividend date — this window starts exactly 45 days before the REIT or fund’s ex-dividend date and ends 45 days after. For specificity, investors may count the day their shares were sold, but they cannot include the date the shares were initially purchased.
For more information on REITs, dividend taxation or ex-dividend dates, see our related articles below.
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