REIT ETFs in Taxable Account: To sell or not ?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
SlowMovingInvestor
Posts: 816
Joined: Sun Sep 11, 2016 11:27 am

REIT ETFs in Taxable Account: To sell or not ?

Post by SlowMovingInvestor » Sun Sep 23, 2018 7:26 pm

I hold 2 REIT ETFs in a taxable account (when I bought them, I did not have tax advantaged space available). Both have embedded LT capital gains

VNQ (Vanguard Real Estate ETF) Yield: 3,68% -- Embedded LT capital gains of around 62%
VNQI (Vanguard International Real Estate ETF) Yield 3.39% -- Embedded LT capital gains of around 29%

There is also a foreign tax credit on VNQI that offsets a small portion of the earnings.

I'm wondering whether to sell and buy them back in IRA accounts (I do have some available cash there). I do want to have some REITS in my portfolio, rather than stick with total stock market. The trade off is to pay the earnings at my marginal tax rate (currently 31% or so Fed + state) for the next few years, or whether to sell and take the LT hit right now.

I was trying to do the calculations to see what would work out best (but it is a bit of a headache with lots of assumptions). But note that if I do sell, I'll probably buy taxable bonds in my taxable accounts with the proceeds (after taxes) since I am a little below my FI target allocation.

Given that, would I be better off sticking with the REIT in my taxable accounts rather than take the LT CG hit ?

User avatar
grabiner
Advisory Board
Posts: 22692
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by grabiner » Sun Sep 23, 2018 8:20 pm

I would suggest selling these funds. Yes, you'll pay tax on the capital gain, but you will make up for it by paying less in taxes every year, and your capital gain will be lower when you sell the replacement fund.

Global Real Estate has a foreign tax credit of 5% of the dividend, but that isn't enough to make it good for a taxable account because the dividend is high and only 15% qualified (both figures from 2017).

The wiki has more detail, and a link to a spreadsheet you can use to estimate the break-even point; see Paying a tax cost to switch funds.
Wiki David Grabiner

User avatar
indexfundfan
Posts: 2216
Joined: Tue Feb 20, 2007 11:21 am
Contact:

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by indexfundfan » Sun Sep 23, 2018 8:25 pm

It's a tough choice, whether to take the hit now and move the REITs into the appropriate tax-efficient location. After you moved them into the tax-efficient location, you will save on taxes, but it will take many years to breakeven with your initial tax hit.

Some random thoughts:

Do you have any tax loss you can harvest to offset the gain?

Do you think a market correction will occur within the next few years that will generate losses to offset the gains?

Will your tax situation change -- e.g. will you be in a lower tax bracket or moving to a state with lower taxes soon?

Do you have kids? You can gift the shares to UTMA accounts.
My signature has been deleted.

User avatar
grabiner
Advisory Board
Posts: 22692
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by grabiner » Sun Sep 23, 2018 9:48 pm

indexfundfan wrote:
Sun Sep 23, 2018 8:25 pm
Do you think a market correction will occur within the next few years that will generate losses to offset the gains?
Independent of the market timing issue, this isn't a reason to wait. If you switch and the market drops, you will have a large capital loss to harvest, and you will probably save more in taxes from the capital loss than you paid on the capital gain.
Do you have kids? You can gift the shares to UTMA accounts.
However, under the kiddie tax, the kids will pay taxes at a high rate if they sell too much of the ETF on their own.

Another similar idea is donating the ETFs to charity. You shouldn't do this just to save on taxes, but if you want to make a large donation to a charity, donating the ETFs is a good way to do it.
Wiki David Grabiner

User avatar
Taylor Larimore
Advisory Board
Posts: 27422
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Wiki tax-cost article

Post by Taylor Larimore » Sun Sep 23, 2018 10:07 pm

David:

I had not seen the article you linked in the wiki about computing the cost to switch unwanted funds in a taxable account. It was badly needed. I'll bet you wrote it. Thank you.

https://www.bogleheads.org/wiki/Paying_ ... itch_funds

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
grabiner
Advisory Board
Posts: 22692
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Wiki tax-cost article

Post by grabiner » Sun Sep 23, 2018 10:42 pm

Taylor Larimore wrote:
Sun Sep 23, 2018 10:07 pm
David:

I had not seen the article you linked in the wiki about computing the cost to switch unwanted funds in a taxable account. It was badly needed. I'll bet you wrote it. Thank you.

https://www.bogleheads.org/wiki/Paying_ ... itch_funds
You can click on the "View history" tab on a wiki page to see who edited it, and why.

One of the main purposes of the wiki is to have a page which represents the collective wisdom of the Bogleheads, so that the page can be referenced in a discussion. That is the reason I have created many pages, and added sections to others; similarly, I also cite pages created by other editors. But I don't own my creations; I expect other editors to review my pages (and vice versa), updating and clarifying as necessary, so that the wiki continues to represent the collective wisdom.

This particular page was one I created 10 years ago, probably because I needed to create the spreadsheet in order to answer the question in an ongoing discussion, and then decided that the issue should have a more permanent home because the question would come up again.
Wiki David Grabiner

User avatar
indexfundfan
Posts: 2216
Joined: Tue Feb 20, 2007 11:21 am
Contact:

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by indexfundfan » Sun Sep 23, 2018 11:06 pm

grabiner wrote:
Sun Sep 23, 2018 9:48 pm
indexfundfan wrote:
Sun Sep 23, 2018 8:25 pm
Do you think a market correction will occur within the next few years that will generate losses to offset the gains?
Independent of the market timing issue, this isn't a reason to wait. If you switch and the market drops, you will have a large capital loss to harvest, and you will probably save more in taxes from the capital loss than you paid on the capital gain.
If you switch REITs to the tax-deferred account now, your taxes are due this year. And if the market drops next year, you cannot harvest the loss in the REITs anymore because they will be in the tax-deferred account. Even if there are loss in the other funds to harvest next year, you are limited to harvesting $3000 a year.

Just to put some numbers: if say you sell the REITs for $30k of gains this year, you have to pay taxes on this $30k of gains. Suppose the market drops next year and your harvested $30k of losses, you can only use $3k to offset against any income next year. It will take OP 10 years to "get back" the tax losses harvested (assuming no other CG changes in the future years).

Contrast this with if you sell REITs next year, the $30k of gains in the REITs will be offset by $30k of losses -- no taxes due.

Of course all this is dependent on how the market moves, which you can't predict. But in this case, OP is not market timing to change the asset allocation. OP is still invested in the same assets.
Last edited by indexfundfan on Sun Sep 23, 2018 11:27 pm, edited 1 time in total.
My signature has been deleted.

User avatar
indexfundfan
Posts: 2216
Joined: Tue Feb 20, 2007 11:21 am
Contact:

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by indexfundfan » Sun Sep 23, 2018 11:11 pm

grabiner wrote:
Sun Sep 23, 2018 9:48 pm
Do you have kids? You can gift the shares to UTMA accounts.
However, under the kiddie tax, the kids will pay taxes at a high rate if they sell too much of the ETF on their own.
Yes, the 0% fed rate is limited to $4700 of LTCG per kid per year as I understand it (provided the kid has no other income). Obviously you must have valid expenses in the UTMA account for this to work.

PS. Tax forms are still not finalized.
My signature has been deleted.

SlowMovingInvestor
Posts: 816
Joined: Sun Sep 11, 2016 11:27 am

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by SlowMovingInvestor » Mon Sep 24, 2018 9:54 am

Thanks for the comments, and for the spreadsheet link.

I really don't have that many tax losses to use up. OTOH, I just realized that I have around a 7% embedded gain in VWEHX (Vanguard High Yield Corporate), with a 5.63% yield. With the smaller emebdded gain and the larger payout, this fund is my number one choice to drop now. I 'm also coming around to the view (expressed by many Bogleheads) that one should take risks with equities, rather than bonds, and stick to high quality bonds.

User avatar
grabiner
Advisory Board
Posts: 22692
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by grabiner » Mon Sep 24, 2018 6:20 pm

indexfundfan wrote:
Sun Sep 23, 2018 11:06 pm
grabiner wrote:
Sun Sep 23, 2018 9:48 pm
indexfundfan wrote:
Sun Sep 23, 2018 8:25 pm
Do you think a market correction will occur within the next few years that will generate losses to offset the gains?
Independent of the market timing issue, this isn't a reason to wait. If you switch and the market drops, you will have a large capital loss to harvest, and you will probably save more in taxes from the capital loss than you paid on the capital gain.
If you switch REITs to the tax-deferred account now, your taxes are due this year. And if the market drops next year, you cannot harvest the loss in the REITs anymore because they will be in the tax-deferred account.
However, if the market drops, it is just as likely that the replacement funds will drop as that the REITs will drop.
Just to put some numbers: if say you sell the REITs for $30k of gains this year, you have to pay taxes on this $30k of gains. Suppose the market drops next year and your harvested $30k of losses, you can only use $3k to offset against any income next year. It will take OP 10 years to "get back" the tax losses harvested (assuming no other CG changes in the future years).

Contrast this with if you sell REITs next year, the $30k of gains in the REITs will be offset by $30k of losses -- no taxes due.
It's actually better if the loss is next year, because the $3K per year of capital loss can be offset against ordinary income at your full tax rate. If you have a $30K gain and a $30K loss in the same year, you pay no tax. If you have a $30K gain one year and a $30K loss the next year, and you are in a 24% tax bracket, you pay $4500 tax on the $30K gain, but then save $720 per year in tax over the following ten years.
Wiki David Grabiner

User avatar
grabiner
Advisory Board
Posts: 22692
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by grabiner » Mon Sep 24, 2018 6:22 pm

SlowMovingInvestor wrote:
Mon Sep 24, 2018 9:54 am
I really don't have that many tax losses to use up. OTOH, I just realized that I have around a 7% embedded gain in VWEHX (Vanguard High Yield Corporate), with a 5.63% yield. With the smaller emebdded gain and the larger payout, this fund is my number one choice to drop now. I 'm also coming around to the view (expressed by many Bogleheads) that one should take risks with equities, rather than bonds, and stick to high quality bonds.
This fund should definitely be sold. High-yield bonds produce entirely non-qualified dividends, and you expect the taxable yield to exceed the total return because of defaults. If you do want to hold high-yield bonds, and can do it with no tax concerns, they are OK in an IRA. (I don't hold any myself.)
Wiki David Grabiner

User avatar
indexfundfan
Posts: 2216
Joined: Tue Feb 20, 2007 11:21 am
Contact:

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by indexfundfan » Mon Sep 24, 2018 7:10 pm

grabiner wrote:
Mon Sep 24, 2018 6:20 pm
indexfundfan wrote:
Sun Sep 23, 2018 11:06 pm
Just to put some numbers: if say you sell the REITs for $30k of gains this year, you have to pay taxes on this $30k of gains. Suppose the market drops next year and your harvested $30k of losses, you can only use $3k to offset against any income next year. It will take OP 10 years to "get back" the tax losses harvested (assuming no other CG changes in the future years).

Contrast this with if you sell REITs next year, the $30k of gains in the REITs will be offset by $30k of losses -- no taxes due.
It's actually better if the loss is next year, because the $3K per year of capital loss can be offset against ordinary income at your full tax rate. If you have a $30K gain and a $30K loss in the same year, you pay no tax. If you have a $30K gain one year and a $30K loss the next year, and you are in a 24% tax bracket, you pay $4500 tax on the $30K gain, but then save $720 per year in tax over the following ten years.
That's an interesting argument. I think the scenario is similar to the following:

It's near to the end of the year and you have just realized a bunch of LTCGs ($30k).

Would you a) harvest the losses you have in some other holdings to offset the losses such that you pay no tax?

Or b) do you postpone harvesting the losses to the next year and instead choose to pay the taxes for the LTCGs? The decision is what guides the example above.
My signature has been deleted.

User avatar
indexfundfan
Posts: 2216
Joined: Tue Feb 20, 2007 11:21 am
Contact:

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by indexfundfan » Mon Sep 24, 2018 7:16 pm

SlowMovingInvestor wrote:
Mon Sep 24, 2018 9:54 am
Thanks for the comments, and for the spreadsheet link.

I really don't have that many tax losses to use up. OTOH, I just realized that I have around a 7% embedded gain in VWEHX (Vanguard High Yield Corporate), with a 5.63% yield. With the smaller emebdded gain and the larger payout, this fund is my number one choice to drop now. I 'm also coming around to the view (expressed by many Bogleheads) that one should take risks with equities, rather than bonds, and stick to high quality bonds.
Yes, probably a good time to liquidate, especially if you plan to move the proceeds into high quality bonds or munis. Both of these are near their 52-week lows.
My signature has been deleted.

pepelepuanteur
Posts: 4
Joined: Mon May 14, 2018 11:44 am

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by pepelepuanteur » Tue Sep 25, 2018 9:13 am

I did not have tax advantaged space available
Can anyone explain this in greater detail to me? Does it mean that OP has a brokerage account and an IRA and, at the time, couldn't purchase the REIT ETFs within his/her IRA due to the contributions limit? Or am I totally off base?

Genuinely trying to learn more about investing :happy

SlowMovingInvestor
Posts: 816
Joined: Sun Sep 11, 2016 11:27 am

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by SlowMovingInvestor » Tue Sep 25, 2018 10:23 am

pepelepuanteur wrote:
Tue Sep 25, 2018 9:13 am
I did not have tax advantaged space available
Can anyone explain this in greater detail to me? Does it mean that OP has a brokerage account and an IRA and, at the time, couldn't purchase the REIT ETFs within his/her IRA due to the contributions limit? Or am I totally off base?

Genuinely trying to learn more about investing :happy

I didn't have enough free funds in my IRA (only had a relatively small IRA at that time) and I didn't want to sell some of the IRA holdings to buy REITs.

pepelepuanteur
Posts: 4
Joined: Mon May 14, 2018 11:44 am

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by pepelepuanteur » Tue Sep 25, 2018 2:20 pm

SlowMovingInvestor wrote:
Tue Sep 25, 2018 10:23 am
I didn't have enough free funds in my IRA (only had a relatively small IRA at that time) and I didn't want to sell some of the IRA holdings to buy REITs.
Thanks!

User avatar
grabiner
Advisory Board
Posts: 22692
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by grabiner » Tue Sep 25, 2018 7:57 pm

indexfundfan wrote:
Mon Sep 24, 2018 7:10 pm
grabiner wrote:
Mon Sep 24, 2018 6:20 pm
indexfundfan wrote:
Sun Sep 23, 2018 11:06 pm
Just to put some numbers: if say you sell the REITs for $30k of gains this year, you have to pay taxes on this $30k of gains. Suppose the market drops next year and your harvested $30k of losses, you can only use $3k to offset against any income next year. It will take OP 10 years to "get back" the tax losses harvested (assuming no other CG changes in the future years).

Contrast this with if you sell REITs next year, the $30k of gains in the REITs will be offset by $30k of losses -- no taxes due.
It's actually better if the loss is next year, because the $3K per year of capital loss can be offset against ordinary income at your full tax rate. If you have a $30K gain and a $30K loss in the same year, you pay no tax. If you have a $30K gain one year and a $30K loss the next year, and you are in a 24% tax bracket, you pay $4500 tax on the $30K gain, but then save $720 per year in tax over the following ten years.
That's an interesting argument. I think the scenario is similar to the following:

It's near to the end of the year and you have just realized a bunch of LTCGs ($30k).

Would you a) harvest the losses you have in some other holdings to offset the losses such that you pay no tax?

Or b) do you postpone harvesting the losses to the next year and instead choose to pay the taxes for the LTCGs? The decision is what guides the example above.
In theory, I would wait.

However, it would have to be very close to the end of the year to be worth waiting. The problem with waiting to harvest a loss is that the market might rise and you lose the opportunity to harvest it; meanwhile, if the market falls rather than rising, you don't lose anything by harvesting a loss, since you can re-harvest.

The asymmetry for the OP works in the opposite direction. If the market falls, he hasn't lost anything by selling this year, since he can harvest the loss next year. If the market rises, he will have a larger capital gain when he sells. This is the reason to sell now rather than waiting.
Wiki David Grabiner

User avatar
samsoes
Posts: 867
Joined: Tue Mar 05, 2013 9:12 am
Location: Northeast Rat Race

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by samsoes » Tue Sep 25, 2018 8:06 pm

Aside from the reasons listed by the good folks above, VNQ's were the sole reason why I had to file amended returns 4 of the past 5 years. Corrections on Return of Capital, Unrecaptured Section 1250 Gain, etc.

Ditch 'em. You'll be glad you did. And good riddance.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. | (Avatar is the statue of Gen. Warren atop Little Round Top @ Gettysburg National Military Park.)

User avatar
patrick013
Posts: 2365
Joined: Mon Jul 13, 2015 7:49 pm

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by patrick013 » Tue Oct 02, 2018 3:32 pm

Depending on your tax rate you may be able to keep REIT's
in taxable, if really want to invest in real estate.

New Tax Plan Is Boon for REITs

But, they could have made the deduction 30% instead of 20%.

Just FYI.
age in bonds, buy-and-hold, 10 year business cycle

grok87
Posts: 8376
Joined: Tue Feb 27, 2007 9:00 pm

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by grok87 » Tue Oct 02, 2018 4:32 pm

patrick013 wrote:
Tue Oct 02, 2018 3:32 pm
Depending on your tax rate you may be able to keep REIT's
in taxable, if really want to invest in real estate.

New Tax Plan Is Boon for REITs

But, they could have made the deduction 30% instead of 20%.

Just FYI.
Only applies to individual reits held In taxable accounts. Mutual funds and etfs do not get the benefit. And believe me I wish I was joking.
:(
Keep calm and Boglehead on. KCBO.

grok87
Posts: 8376
Joined: Tue Feb 27, 2007 9:00 pm

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by grok87 » Tue Oct 02, 2018 4:44 pm

samsoes wrote:
Tue Sep 25, 2018 8:06 pm
Aside from the reasons listed by the good folks above, VNQ's were the sole reason why I had to file amended returns 4 of the past 5 years. Corrections on Return of Capital, Unrecaptured Section 1250 Gain, etc.

Ditch 'em. You'll be glad you did. And good riddance.
Thanks.
I wonder if that problem still exists if you own individual reits...
Keep calm and Boglehead on. KCBO.

User avatar
patrick013
Posts: 2365
Joined: Mon Jul 13, 2015 7:49 pm

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by patrick013 » Tue Oct 02, 2018 4:52 pm

grok87 wrote:
Tue Oct 02, 2018 4:32 pm
patrick013 wrote:
Tue Oct 02, 2018 3:32 pm
Depending on your tax rate you may be able to keep REIT's
in taxable, if really want to invest in real estate.

New Tax Plan Is Boon for REITs

But, they could have made the deduction 30% instead of 20%.

Just FYI.
Only applies to individual reits held In taxable accounts. Mutual funds and etfs do not get the benefit. And believe me I wish I was joking.
:(
Right you are.

From Vanguard: “The fund industry is currently working through its trade groups to obtain regulatory guidance on this issue.” (Forbes)
age in bonds, buy-and-hold, 10 year business cycle

User avatar
Taylor Larimore
Advisory Board
Posts: 27422
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by Taylor Larimore » Tue Oct 02, 2018 7:27 pm

Bogleheads:

The market weight in REITs is ALREADY in Total Stock Market Index Fund. Also, if you own your home (mortgage or not), you already own a good chunk of real estate.

Personally, I don't bother with a separate REIT fund. Read my "Simplicity" link below.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
patrick013
Posts: 2365
Joined: Mon Jul 13, 2015 7:49 pm

Re: REIT ETFs in Taxable Account: To sell or not ?

Post by patrick013 » Tue Oct 02, 2018 9:53 pm

Taylor Larimore wrote:
Tue Oct 02, 2018 7:27 pm
Bogleheads:

The market weight in REITs is ALREADY in Total Stock Market Index Fund. Also, if you own your home (mortgage or not), you already own a good chunk of real estate.

Personally, I don't bother with a separate REIT fund. Read my "Simplicity" link below.

Best wishes.
Taylor
Well your simplicity link isn't that simple. All those authors ! :)

Many people have owned RE and rec'd regular income and/or LTCG.

So for their benefit index REIT's can be a tilt. Individual REIT's
can even fail. Individual RE investments can fail. Index REIT's
can assure a RE investor that high occupancy property is being
invested in. So those that understand RE have that investment
as a small tilt. Hopefully the tax deduction will happen for index
REIT's.
age in bonds, buy-and-hold, 10 year business cycle

Post Reply