7980 / How is a REIT shareholder taxed when the shareholder sells, exchanges, or redeems shares?

The gain or loss is the difference between the shareholder’s adjusted tax basis in the shares and the amount realized from the sale, exchange, or redemption (which includes money plus the fair market value of any property received. See Q 692.)²

If a shareholder’s shares in the REIT were acquired on the same day and for the same price, the shareholder will have little difficulty in establishing the tax basis and holding period of the shares sold, exchanged, or redeemed. However, if the shares were acquired at different times or prices, the process is more difficult; unless the shareholder can “adequately identify” the lot from which the shares being sold or exchanged originated, the shareholder must treat the sale or exchange as disposing of the shares from the earliest acquired lots (i.e., by a first-in, first-out (FIFO) method). If the earliest lot purchased or acquired is held in a stock certificate that represents multiple lots of stock, and the taxpayer does not adequately identify the lot from which the stock is sold or transferred, the stock sold or transferred is charged against the earliest lot included in the certificate.³ In connection with reporting sales of securities to the IRS, brokers will be obligated to provide the customer’s basis in, and holding period for, shares sold, and brokers must use the principles just described to determine which shares were sold (i.e., FIFO if the shares cannot be adequately identified).⁴ The “average basis” methods discussed in Q 7949 for mutual fund shares are not available to REIT shareholders. For an explanation of how shares may be “adequately identified,” see Q 700.

See Q 7615 and Q 7616 for the income tax consequences upon the disposition of a position that is held as part of a conversion transaction.