REIT dividends and PTP income under Prop. Regs. Sec. 1.199A-3(d)

By Eric Mauner, CPA, Melville, N.Y.

Editor: Kevin D. Anderson, CPA, J.D.

Sec. 199A allows a taxpayer other than a corporation a deduction equal to the lesser of (1) the combined qualified business income (QBI) amount or (2) 20% of the taxpayer's taxable income in excess of net capital gain. Included in the combined QBI amount under Sec. 199A(b)(1) is 20% of the aggregate amount of qualified real estate investment trust (REIT) dividend income and qualified publicly traded partnership (PTP) income. Therefore, dividends from REITs and income from PTPs generally qualify for the 20% deduction.

Based on the statutory language, shareholders of regulated investment companies (RICs) with investments in REITs and PTPs were not initially availed the benefit of the QBI deduction on income passed through the RIC to shareholders. Amid uncertainty as to whether this could result in disposal of RIC holdings in exchange for direct investments in REITs and PTPs, while Treasury and the IRS issued final regulations generally for Sec. 199A, they concurrently issued additional proposed regulations addressing REIT dividends paid through a RIC (Prop. Regs. Sec. 1.199A-3(d); REG-134652-18).


Sec. 851(a)(1) defines a RIC as any domestic corporation that, at all times during the tax year, is registered under the Investment Company Act of 1940, P.L. 76-768, as amended, and: (1) is a management company or unit investment trust; (2) has an election in effect to be treated as a business development company; or (3) is a common trust fund or similar fund that is neither an investment company under Section 3(c)(3) of the Investment Company Act nor a common trust fund as defined under Sec. 584(a).

To maintain RIC status, the company must distribute at least 90% of its taxable income to its shareholders. A reduction in RIC taxable income is allowed for these distributions in the form of a dividends-paid deduction. If it distributes 100% of taxable income, the RIC can avoid an entity-level tax on income. The benefit of RIC status comes at a high price, in the form of annual and quarterly qualification tests of the RIC's income and assets.

The annual gross income test under Sec. 851(b)(2) was enacted to ensure the entity's activities are investment-related. Under this test, at least 90% of the RIC's gross income must be derived from passive sources such as dividends; interest; gross realized gains and payments with respect to securities loans and foreign currencies; net income derived from an interest in a qualified PTP; and other income derived from its business of investing in stock, securities, or currencies. Additionally, at least 90% of tax-exempt and investment company taxable income must be distributed annually. Income not distributed is subject to tax under the C corporation tax regime.

On a quarterly basis, the RIC is subject to a gross assets test in which at least 50% of the value of its total assets must be invested in cash and cash items, government securities, securities of other RICs, and securities of other issuers. The securities of any one other issuer must be 5% or less of the value of the RIC's total assets and 10% or less of the outstanding voting stock of the issuer. Furthermore, no more than 25% of total assets may be in any one other issuer, in two or more issuers that the RIC controls (defined as 20% of the total combined voting power of all classes of stock of the issuer entitled to vote) that are in a similar business, or in the securities of one or more qualified PTPs.


The tax treatment of REITs dates to legislation enacted in 1960. They were originally intended to allow those who had insufficient capital to engage in real estate investing on their own to take advantage of real estate investment opportunities. REITs have similar requirements as RICs, including income and asset tests performed on an annual or quarterly basis, respectively.

A REIT's gross income must meet two annual tests: (1) Generally, at least 75% of the gross income must be from real estate—related sources, and (2) at least 95% of the gross income must be from sources qualifying under the 75% income test plus other interest, dividends, and portfolio-type income (Sec. 856(c)).

On a quarterly basis, a REIT must satisfy seven interacting asset tests:

  • At least 75% of the value of the REIT's total assets must consist of real estate assets, cash and cash items, and government securities;
  • Not more than 25% of the value of its total assets may consist of securities, other than those included under the 75% test;
  • Not more than 20% of the value of its total assets may consist of securities of one or more taxable REIT subsidiaries (reduced from 25%, effective for tax years beginning after Dec. 31, 2017);
  • Not more than 25% of the value of its total assets is represented by nonqualified publicly offered REIT debt instruments;
  • Not more than 5% of the value of its total assets may consist of securities of any one issuer, except with respect to a taxable REIT subsidiary;
  • Not more than 10% of the outstanding total voting power of the outstanding securities of any one issuer may be held, except with respect to a taxable REIT subsidiary; and
  • Not more than 10% of the total value of the outstanding securities of any one issuer may be held, except with respect to a taxable REIT subsidiary.

Just like the RIC, 90% of taxable income of the REIT must be distributed (Sec. 857(a)). While any taxable income retained by the REIT is subject to the C corporation tax regime, distribution of 100% of the REIT's taxable income will eliminate an entity-level tax.

REITs have additional ownership and organizational requirements, which are beyond the scope of this discussion.


Under Sec. 7704(b), a PTP is any partnership whose interests are traded on an established securities market or secondary market.

Sec. 199A and qualified REIT dividends

Under Regs. Sec. 1.199A-3(c)(2), the term "qualified REIT dividend" means any dividend from a REIT received during the tax year that is not a capital gain dividend under Sec. 857(b)(3) and is not qualified dividend income under Sec. 1(h)(11). Since capital gain dividends and qualified dividend income are already subject to a preferential income tax rate for noncorporate taxpayers, a deduction under Sec. 199A would provide an additional reduction to the effective income tax rate, which was not the original intent of the QBI deduction. Regs. Sec. 1.199A-3(c)(2)(ii) also requires a holding period of more than 45 days for the stock with respect to which the qualified REIT dividend is received.

Qualified PTP income

In general, under Regs. Sec. 1.199A-3(c)(3), the term "qualified PTP income" means the sum of the net amount of the taxpayer's allocable share of income, gain, deduction, and loss from a PTP that is not taxed as a C corporation, plus any gain or loss attributable to assets of the PTP giving rise to ordinary income under Sec. 751(a) or (b) that is considered attributable to the trades or businesses conducted by the partnership.

Prop. Regs. Sec. 1.199A-3(d)

The final regulations under Sec. 199A were published in the Federal Register on Feb. 8, 2019 (T.D. 9847). The preamble notes that the final regulations do not treat RICs as relevant passthrough entities for purposes of Sec. 199A because a RIC is a C corporation. Concurrently with the final regulations, though, Treasury and the IRS published the additional proposed regulations, which allow for the payment by RICs of dividends that certain shareholders may include as qualified REIT dividends under Sec. 199A(b)(1)(B).

However, the proposed regulations do not provide for the passthrough of qualified PTP income by RICs. Instead, Treasury and the IRS will continue to weigh potential passthrough treatment of qualified PTP income, and they have requested comments on the complex issues that would need to be addressed if RICs were allowed to pass through qualified PTP income.


Kevin D. Anderson, CPA, J.D., is a partner, National Tax Office, with BDO USA LLP in Washington, D.C.

For additional information about these items, contact Mr. Anderson at 202-644-5413 or

Unless otherwise noted, contributors are members of or associated with BDO USA LLP.

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