What is a REIT dividend?

What is a REIT dividend?


Can a REIT Dividend Be considered a Qualified Dividend?

Real estate investment trusts (REITs) are a kind of company that invests entirely in real estate portfolios. They are exempt from spending income taxes on their own income, provide they channel at least 90 percent of profits to their shareholders as dividends. These come from rent payments, and capital gain distributions, symbolizing the shareholder’s pro rata share of profitable sales of qualities, less any losses in the REIT portfolio.

Qualified Dividends

The actual U. S. tax code grants favorable treatment to dividend earnings from U. S. -based companies, under certain circumstances. The company should have been formed in the U. S., a U. S. ownership, or be from a country that has negotiated this favorable treatment via a treaty agreement with the U. S. It can also marketplace its shares on U. S.

exchanges via American Depositary Bills, or ADRs. As of 2011, dividends from qualified companies are taxed at 0 percent for all those in the 10 to 15 percent marginal income tax mounting brackets, and 15 percent for everyone else. This favorable arrangement expires at the conclusion of 2012, at which point all dividend income is taxed based on ordinary income rates, unless Congress extends or alters the current law.

Taxation of REITs

While the IRS does not require the REIT itself to pay for income taxes, most income from REITs is taxable at ordinary income rates towards the shareholder. REIT income, therefore, does not generally qualify for exactly the same tax treatment afforded to qualified dividends.

Tax Comparisons

Although the majority of REIT income is taxable at ordinary income rates, this is generally favorable to the tax treatment afforded to C corporations, that are subject to double taxation. Because C corporations cannot deduct dividend obligations to shareholders, they must pay income taxes on their own profits at 35 percent before they are able to distribute income to shareholders. Most taxpayers have individual income taxes rates below the 35 percent threshold, so they benefit in the pass-through tax treatment of REIT dividends.

Considerations

Regardless of taxation, REITs can offer investors with an efficient diversified exposure to the real property asset class, which frequently moves in a different direction compared to stock market. Some exposure to REITs can help diversify a person investment portfolio.

What Is the Tax Status of REIT Returns

Real estate investment trust (REIT) stocks are shares of companies that has to own or finance real estate to qualify for special REIT taxes rules. One benefit of the REIT tax rules is these companies often must pay very attractive dividends to maintain their own REIT status. On the flip side, though, investors get no special tax advantages of REIT dividends.

REIT Status
A company that qualifies to be considered a REIT under the tax rules does not pay federal corporate tax. To maintain its tax-exempt status, a REIT must pay out a minimum of 90 percent of its annual net income as dividends in order to shareholders. As a result, the dividends paid on a REIT stock represent profits which have not been taxed. Because of the tax benefits of owning property, such as depreciation write-offs, it is not uncommon for a REIT to pay for dividends greater than the reported net income.
Qualified vs. Non-Qualified Returns
Dividends earned from stock shares have either qualified or non-qualified taxes status. The dividends paid by a corporation that pays corporate tax on the profits before dividends are paid, fall into the actual “qualified” category. The tax rate on qualified dividends is a smaller amount — 0 or 15 percent for most taxpayers — compared to investor’s regular income tax bracket. However, since a REIT pays no corporate tax, the dividends from REIT stocks are not qualified.
Dividends Taxed at the Regular Rate
If you own REIT shares in a normal brokerage account, the tax rate you pay on the REIT dividends is going to be your regular, marginal income tax rate. The Form 1099-DIV you obtain from your broker includes the REIT dividends in the complete ordinary dividends box, but those distributions will not be contained in the qualified dividends box. With qualified dividends — not REIT dividends — the cash has been taxed at the corporate level and on your own tax return. As non-qualified dividends, the REIT distributions are just taxed once, but at a higher rate.
Own REITs inside a Tax-Advantaged Account
If your portfolio — or plans for 1 — includes owning stocks that pay both qualified and REIT returns, you may want to include some tax planning in your own stock investment strategy. If you own REIT shares in a tax-advantaged account — like a traditional or Roth IRA — you get around paying the larger tax rate on the REIT dividends. Own the stocks that pay qualified dividends in a regular brokerage account to make use of the lower tax rate on those earnings.

REIT
REITs, dividends and UNITED KINGDOM tax

Important note

This summary of tax consequences for shareholders is supposed to provide only a general outline of the subjects protected. It should be regarded as neither comprehensive nor sufficient to make decisions, nor should it be used in place of expert tax advice. The British Land Company PLC accepts no responsibility for just about any loss arising from any action taken or not taken by anyone using this material.
Dividends and our obligations as a REIT

As a Investment Trust (REIT), British Land must follow certain rules associated with money it distributes to shareholders, and how those distributions tend to be taxed. 90% of the tax-exempt profit from British Land’s property rental business needs to be distributed to shareholders. This is known as a Property Earnings Distribution, or ‘PID’. British Land can also distribute taxed income from its alternative activities, known as a Non-Property Income Distribution, or ‘non-PID’.
These distributions are commonly made by means of dividend payments. Dividends can be entirely PID, entirely non-PID, or a mix of the two; the Board will decide the most appropriate make-up on the dividend-by-dividend basis. Further, the PID/non-PID make-up of the Scrip Dividend Alternative might be different to that of the underlying cash dividend.

PID & non-PID dividend obligations
Shareholders should note that the tax treatment of PID as well as non-PID dividends differs. PIDs are taxable as property letting income within the hands of tax-paying shareholders, but treated separately from any additional property letting income which shareholders may receive.
Profits distributed as PID dividends are paid out of British Land’s tax-exempt profits and so are potentially fully taxable in shareholders’ hands as property letting earnings.

PID dividends are normally paid after deduction of withholding tax in the basic rate of income tax (20%), which the REIT pays to HMRC with respect to the shareholder. Certain types of shareholder are tax exempt as well as receive gross PID dividends. Examples of such classes are:

  • UNITED KINGDOM Companies
  • Charities
  • Local Authorities
  • UK Pension Schemes
  • Managers of PEPs, ISAs as well as Child Trust Funds
  • For UK resident individuals who receive taxation statements, the PID from a UK REIT is included as additional income. On the tax return, the total amount of the actual PID received is shown in box 17, the amount of tax shown as deducted about the voucher is shown in box 19 and the fact the income is PID ought to be included in box 21.
  • The non-PID element of dividends will be treated in a similar way as dividends received from other non-REIT UK companies. The actual tax free Dividend Allowance (£5, 000 for 2016/17) will affect the non-PID element of dividends received by UK resident shareholders susceptible to UK income tax from 6 April 2016. It should be noted this Allowance does not apply to the PID element of returns.
  • For UK resident individuals who receive tax returns, any normal dividend paid through the UK REIT is included on the return as a dividend from the UK company. Your dividend voucher will show your shares within the company, the dividend rate, and the tax credit (with regard to 2016 and prior) and dividend payable. Put the total dividend payments in box 4 – don’t add on the tax credit.

Reinvesting dividends
For shareholders who would like to re-invest their British Land dividends in the company, we offer a Scrip Dividend Scheme which enables shareholders to receive new Ordinary Shares instead of cash, for dividends where a Scrip Dividend Alternative is provided.

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