Real estate investment trusts (REITs) typically don't qualify for the same favorable tax treatment than most dividend stocks do. However, thanks to the Tax Cuts and Jobs Act, REIT investors may be able to take advantage of the new 20% tax deduction for pass-through income, which includes REIT dividends.

In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss the tax differences between REITs and other dividend stocks.

A full transcript follows the video.

This video was recorded on Nov. 26, 2018.

Jason Moser: OK, Matt, let's take a look at some email questions we've pulled in over the past couple of weeks. We had a question from Jay Otto in Oshkosh, Wisconsin. He says, "I love your podcast. I enjoy listening to you on the other podcasts, as well." Thanks, Jay! I like being on those podcasts. I think he's talking about me, Matt, but I'm not sure. He had a question on REITs. I'm going to give you this question, Matt, because you're our REIT guy. "Is there any difference in investing in REIT stocks vs. other equities? I think I've heard in the past that there are different tax implications with these stocks. Is that true?"

Matt Frankel: Yes, that is absolutely true. Provided that you hold them in a taxable account, most dividend stocks have what are called qualified dividend status, which gets favorable tax treatment. Think long-term capital gains rates, the same rates that apply to qualified dividends. Generally, most people pay a 15% dividend tax rate if you're in any of the middle tax brackets. If you have a REIT, though, it's considered pass-through business income for the most part, so you're generally taxed at your ordinary income tax rate for a REIT.

There are a couple caveats to mention. One: your REIT dividend is actually a combination of a qualified dividend and a non-qualified dividend. Depending on the quarter and the particular REIT, most of it is usually ordinary income with a little bit that you'll get a favorable tax treatment on. The second thing is that thanks to the tax reform bill, REITs qualify for that pass-through deduction as small business income. Whatever income you do get from REITs, you can take a 20% deduction for that before your ordinary income tax rates are applied.

There's a lot of moving parts here. The situation is definitely a little more complicated with REITs than it is for other stocks. But I love them. I always recommend REITs in retirement accounts so you don't have to worry about this. But, yes, if you hold them in a regular brokerage account, there's a big tax differences. Long story short, REITs are a little more complicated.

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