Tax Facts

7985 / What is a deficiency dividend? How can a REIT use deficiency dividends to avoid disqualification based on the 90 percent distribution requirement?

A deficiency dividend is a dividend paid by a REIT in a later year with respect to an earlier tax year. Deficiency dividends are typically used when it is determined that an adjustment to a REIT’s taxable income for a prior year, and thus to the corresponding amount required to be distributed to shareholders, was required. Any deficiency dividends are required to be paid within 90 days after it is determined that the adjustment was necessary.1



Determination of whether an adjustment is necessary may be made by a formal court order or may be made by the REIT itself in a statement attached to an amended or supplemental tax return.2 As shown in the following example, the REIT can eliminate its tax liability by distributing the entire amount of the adjustment as a deficiency dividend, but cannot eliminate liability for any interest or penalties that result from the adjustment.3
Example: For 2024, a REIT reports real estate investment trust taxable income (REITTI) of $100, a dividends paid deduction of $100 and thus incurs no tax liability at the corporate level. In 2026, the Tax Court issues a determination that the REIT’s RETTI for 2024 was actually $120. The REIT pays a $20 dividend and files a claim for a dividend deficiency deduction within the required period, and is allowed that deduction for 2024. The REIT therefore has no undistributed REITTI for 2024 and meets its dividend distribution requirement. However, the REIT is still considered to have underreported by $20 and the time for paying its 2024 taxes (including extensions) has expired. The REIT is liable for interest on the $20 under IRC Section 6601 despite the fact that it was granted the dividend deficiency deduction.4

The REIT shareholder is taxed on the deficiency dividend in the year that the shareholder actually receives the dividend payment (even though the deficiency dividend will, by definition, relate to an earlier tax year).5






1.  IRC § 860(f).

2.  IRC § 860(e).

3.  Treas. Reg. § 1.860-3.

4.  See Treas. Reg. § 1.860-3, Ex. 1.

5.  IRC § 858(b).

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