Why are REIT dividends taxed at higher rates than regular stock dividends?

REITs avoid corporate-level tax by passing most of their income to shareholders, so that income has never been taxed at the corporate level and doesn't qualify for the lower qualified-dividend rates. As a result, most REIT distributions are ordinary dividends taxed at your regular income bracket. There is a silver lining: under current law REIT dividends qualify for the 20% qualified business income (QBI) deduction, effectively lowering the rate somewhat, per the IRS. Part of a REIT distribution can also be a nontaxable return of capital, which lowers your basis instead of being taxed now. Because REIT income is largely ordinary, REITs are a classic candidate to hold inside a tax-advantaged account rather than a taxable brokerage.