Information about REIT dividend tax

Information about REIT dividend tax

Exactly how are REIT dividends taxed?

This Posting talked about companies lowering their overall tax load by spinning off or be¬coming REITs that pay no corporate degree of tax. Readers have asked if these real estate investment trusts spend qualifying dividends or are REIT investors taxed like MLP traders. The answers might surprise you.

REITs are like mutual funds for property. They’ve been around since 1960. Like mutual funds, REITs do not pay a corporate level of tax so long as they distribute at least 90% of their income to their shareholders prior to the end of their year. REITs paid out approximately $34 million in “dividends” in 2013. The average REIT yield is more than 3. 5%.

REITs make distributions to their holders that support the tax characteristics of what happened in the REIT. In these types of ways, they are similar to MLPs. REITs, of course, carry their own tax quirks and complications that investors should know.
When a REIT makes a distribution, it is not a dividend from the regular corporation that has paid tax. REIT distributions take numerous forms, with each carrying different tax characteristics. The distributions from a REIT are usually composed of varying percentages of all these different kinds of taxable income – each REIT has its unique combination.


The common wisdom is that REIT distributions tend to be taxed as ordinary income, taxed at the investor’s highest price; this taxable income is from the operating profits of the actual REIT. In 2013, 69% of REIT payments were taxed because ordinary income. Note that some REITs distributed no taxable ordinary income while some had 100% taxed as ordinary income.

REITs also distribute money from operating profits which are currently tax sheltered by depreciation and other deductions. These payments are thought a return of capital that lowers one’s cost basis. If an investor holds the REIT for several year, it is fair to assume that the return-of-capital adjustments to basis produce long-term gains taxed at a favorable rate. In 2013, return-of-capital distributions constituted 14% associated with REIT payments.

Distributions can also be paid out of long-term capital gains realized from properties which were sold by the REIT. These distributions keep their tax nature and may be taxed favorably. This is more common in timber REITs.

Sometimes a REIT receives qualifying dividends from the taxpaying company. The REIT also can pass along the qualifying dividends for their shareholders. Both these qualifying dividends and the long-term gain distributions will be taxed at the favorable tax rates offered to long-term funds gains. Seventeen percent of the REIT distributions paid in 2013 originated from either long-term gains or qualifying income.

There are also numerous cases where investors get taxed on un-recaptured Section 1250 increases, although the percentage of the distributions taxed this way is generally small. This income is taxed at 28%.

It is a rare instance whenever a REIT retains the gain it realized and doesn’t distribute this to shareholders. In this case, the REIT would pay a corporate tax on the gain and pass a tax credit to the investors with a Form 2439 (this is much more prevalent in closed-end funds). I saw none of these within 2013, but they do happen.

Of the 352 REIT 2013 distributions documented on, 45 were distributions that would be taxed entirely as long-term gains, given the above scenario. At the other end of the spectrum, 124 were distributions that were 95% or more ordinary income. The rest all had some amount of both. It can pay to visit and see how your REIT distributions are being taxed.

It seems that, with careful selection, REIT distributions might be tax free for those with capital losses. What the REITs purchase seems to drive the difference.



Ironically, non-U. Utes. REIT distributions can be taxed more favorably than payments through domestic REITs. If a U. S. taxpayer invests in a REIT domiciled in a foreign country which has a tax treaty with the U. S., then dividends on that REIT could be taxed as qualifying dividends. This is because they are foreign companies operating inside a treaty country. Thirty countries besides the U. S. have REIT-like buildings, and 24 are treaty countries.

There are tax twists in order to REITs, but most can be turned to the investor’s advantage when the rules are known.

Investment Opportunities in Timberland and Timber REITs — Growth & Tax-Efficient Income

An investment in timberland or timber REITs (Investment Trusts) may provide a compelling opportunity at this time because of numerous attractive characteristics, including inflation protection, growth, exposure to the development in emerging economies world wide, and tax-efficient income in the case of timber REITs.

For recent years years timberland prices in the U. S. have been stressed out, primarily as a result of the housing collapse. Secondly, there’s been a glut of supply from Canada in recent years because of an insect epidemic, which has forced Canadian timberland owners to harvest a lot more than normal. Now, both of these variables have ceased to depress the marketplace and timber prices have been steadily appreciating, improving the perspective for investment in timberland and timber REITs.

New home sales within the U. S. are about as low as they can perhaps go, having declined by 85% from the peak in 2006. The present level of 300, 000 annualized housing starts is unsustainably low – it’s far below the long-term production of new housing units that’s necessary to absorb the 4 million person increase in the actual U. S. population that occurs each year. This does not imply that home prices have bottomed, only that starts for new real estate units likely have. It is unit volume, not price-per-unit, which ultimately matters in the perspective of an investment in timberland or timber REITs. In addition, it is expected that the Canadian over-supply situation will finish by 2011. Even in the absence of an improvement within the U. S. housing market, the decrease in supply from Canada can lead to increased demand from domestic timberland sources, and it is reasonable to anticipate a substantial increase in lumber prices going forward.

Over the actual long-term, global consumption of wood-based products is strongly correlated along with two variables: population and wealth. The global population is likely to increase by an additional 1. 4b people in the next two decades, and the emerging economies of the world are experiencing quick increases in wealth and living standards. As large populations within these developing countries, such as China, increase their per capita prosperity, it is reasonable to expect that total wood consumption among emerging economies increases and approach levels more consistent with developed economies, such since the U. S. and Japan.

Perhaps the most unique aspect of the investment in timberland or timber REITs is the organic development, literally. Regardless of recession, depressed lumber prices, geopolitical turmoil, or other causes of investment risk, year after year, trees grow bigger. If you purchase a barrel of oil and hold it for 5 many years, you will still only have a barrel of oil. But should you buy an acre of timberland and wait for 5 many years, the combined size of all trees living on that acre may have grown measurably, and you will therefore have more timber compared to you originally purchased. The timberland investment grows, biologically, and this enhances investment returns over the long run.

Timber REITs are of particular interest due to their high amounts of tax-efficient income. Timber REITs, like other REITs, are required to spend 90% of their annual income each year, and benefit by avoiding corporate income tax along the way. To an investor in timber REITs, this dividend income is generally classified as a long-term capital gain and is therefore taxed in the current rate of only 15% – much lower than most investors’ marginal tax rate. This makes timber REITs a great source of tax-efficient earnings. In recent years a handful of timber companies have restructured and elected being timber REITs, providing investors with a new way to make the most of both the attractive timberland market and the tax-favored nature from the timber REIT structure.

If executed properly, the relative success of the investment in timberland or timber REITs is not dependent on higher lumber prices or a noticable difference in the U. S. housing market. Instead, a timberland presents a compelling investment opportunity since it entails numerous attractive characteristics, including inflation protection, growth, leverage in order to emerging market economic development, tax efficiency, and substantial current earnings.

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