What are the tax benefits of a REIT? (2024)

What are the tax benefits of a REIT?

Tax benefits of REITs

Are there tax advantages to REIT?

Individuals can currently deduct 20% of the pass-through income coming from REIT investments. This can incentivize you to invest in a REIT right now as you may pay significantly less in taxes than you would have before this benefit was provided. There is no guarantee that this tax benefit will be extended beyond 2025.

Is it worth holding REITs in taxable account?

Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.

What are the pros and cons of REITs?

Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.

How is REIT yield taxed?

REIT Tax Policy

Most REIT distributions are considered non-qualified dividends, which means that they do not qualify for the capital gains tax rate. In most cases, an individual will have a 15% capital gains rate on qualified dividends and will be charged their regular income tax rate for non-qualified dividends.

Do REITs avoid double taxation?

This article considers this matter at a basic level. A REIT is merely a tax classification that allows an entity that would otherwise be taxed as a corporation to avoid “double taxation” and achieve tax treatment similar to – but in some important ways, different than – a tax partnership.

Why not to invest in REITs?

In most cases, REITs utilize a combination of debt and equity to purchase a property. As such, they are more sensitive than other asset classes to changes in interest rates., particularly those that use variable rate debt. When interest rates rise, REITs share prices can be prone to volatility.

Do you pay tax on REIT dividends?

Some dividends from a REIT are considered a return of your capital—meaning that you are getting some of your invested money back. These dividends aren't taxed at all, since it's just "your" money. However, these dividends reduce your cost basis in your REIT investment.

Where should I hold REITs?

Is a Roth or traditional IRA the best choice? To be clear, retirement accounts are ideal places to hold REIT investments, as the benefits of tax-deferred investing can magnify the already tax-advantaged nature of these companies.

Should I own REITs in a brokerage account?

While some REITs offer the reinvestment of investor's dividends, the investor can't avoid the dividend tax obligations. REITs do qualify for the 20% pass-through deduction, but most investors will need to pay a large amount of taxes on REIT dividends if they hold REITs in a standard brokerage account.

What are the pitfalls of REITs?

Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.

Can REITs lose money?

Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.

What is bad income for REITs?

This is known as the geographic market test. Section 856 (d)(2) (C) excludes impermissible tenant service income (ITSI) from the definition of rent from real property, making it “bad income” for the 75% and 95% REIT gross income tests.

Where do I put REIT income on my tax return?

Reporting Capital Gains Distributions

If you receive capital gains distributions from the sale of REIT assets, these are reported to you on Form 1099-DIV and included in Box 2a. You must report these capital gains distributions as long-term capital gains income on Schedule D of your personal income tax return.

Do I issue a 1099 to a REIT?

A REIT must be a U.S. entity taxable as a corporation (I.R.C. section 856(a)) so the REIT is an "exempt recipient" not reported on Forms 1099.

Do REITs pass through losses?

Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors.

Do REITs complicate taxes?

When it comes to real estate investment trusts, or REITs, taxation is a bit more complicated. Not only can REITs avoid corporate tax altogether, but REIT dividends have a complex tax treatment you should know about before buying shares.

Are REITs better than bonds?

REIT Benefits to Investors

This tax break results in a regular distribution of dividend income to REIT shareholders, and the effective net yields are often higher than the ones from bonds (or stocks), even in cases of high-interest rates.

Are REITs a good investment right now?

The generous dividend payments enjoyed by REIT investors may look particularly attractive moving forward. With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts.

What I wish I knew before investing in REITs?

A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.

How do you get out of a REIT?

With limited redemption options, investors' money can be tied up in the REIT for a long period of time. If the REIT suspends its redemption program, investors may have no option but to turn to selling their shares to third parties on the secondary market.

Why REIT is better than owning property?

Because the REIT manages the property, investors are not burdened with the everyday stress of vacancies, tenants, management or repairs. REITs also pay out dividends to investors, providing a reliable passive income stream.

Which REITs pay the highest dividends?

Should you own REITs in an IRA?

If you invested in the REIT outside of your Roth IRA, the dividends would be taxed as income. In many ways, investing in REITs in your Roth IRA is the ideal way to invest in a REIT. Their dividends greatly compound over time and you won't have to pay taxes on them when you reach retirement age.

Is REIT income passive income?

A REIT is a trust that owns real estate like office spaces, malls, etc., and earns rental income from them and distributes it to the unitholders in the form of dividends. These are like mutual funds but invest in real estate instead of equity, debt, etc. So, it is a passive way of investing in real estate.