REIT’s in a taxable account

[bshnew]

Hi Bogleheads,

My taxable account managed by my former financial advisor has two real estate funds, REET and DFGEX. I read in “The Four Pillars of Investing” and a book by Rob Berger that REIT’s can generate lots of taxes. Should I consider selling them?

An unrelated question: Do any of you use microcap funds, or do you think a small cap value fund is sufficient?

Brooke

[retired@50]

Hi Bogleheads,

My taxable account managed by my former financial advisor has two real estate funds, REET and DFGEX. I read in “The Four Pillars of Investing” and a book by Rob Berger that REIT’s can generate lots of taxes. Should I consider selling them?

Either sell them, or consider re-locating them to a tax deferred account, or a Roth account.

For more on tax efficient fund placement you can check the wiki.

Regards,

[grok87]

i think reits can be fine in taxable accounts.
see this thread
https://seekingalpha.com/article/415833 ... le-account

also the adjusted yield of the vanguard reits fund is something lime 2.27% which is a lot lower than treasuries these days

viewtopic.php?t=400082
cheers,
grok

[retiredjg]

I would not hold REITs in taxable myself. Since you already have REITs in taxable, the question becomes whether to sell them and when.

If you can sell at a loss or only a small gain, that is what I would do. Or if you have banked losses you could use to offset the gains. If not, I don't know what I would do - depends on the whole picture. At the very least, you could turn off reinvestment of dividends so the "problem" does not increase.

[secondopinion]

An unrelated question: Do any of you use microcap funds, or do you think a small cap value fund is sufficient?

Unfortunately, there is not a CRSP U.S. Micro Cap Index (the bottom 2% of cap) fund to go with Vanguard's offerings (which contains all the companies too small for VB, their small-cap ETF). The most similar choice for an ETF is IWC; but with an 0.60% ER, it is very expensive and follows the Russell Microcap Index.
https://www.ishares.com/us/products/239 ... crocap-etf

If one believes in small cap value intensely, then they might want to consider the S&P 600 Value Index or even the S&P 600 Pure Value Index.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

[NiceUnparticularMan]

I think the first question you should ask is what you plan to do with the income (from REITs or any other asset in a taxable account).

If you are just going to use that income to reinvest in the same thing, then any taxable income is bad in the sense you would prefer those returns instead take the form of unrealized capital gains.

If you are actually looking for post-tax income to spend, use for rebalancing, or whatever, then the next question is what forms of income get better or worse tax treatment.

REIT income actually gets pretty favorable treatment. So off hand, I don't have a problem with having an allocation to REITs in a taxable account for income-producing purposes.

[wolf359]

Didn't the tax treatment of REITs change after those books were written?

Specifically, the TCJA of 2017 changed the impact of REITs in taxable accounts.

Individuals are now permitted to deduct up to 20% of ordinary REIT dividends. That provides a slight reduction in tax rates while simultaneously amounting to an after-tax savings of 25%.

You do not get this deduction in a tax deferred or tax exempt account.

I haven't found a microcap fund that I liked. I think small cap is good enough. However, there is a more fundamental question that you have to ask yourself -- were you attracted to those funds because the books (and studies) reported that they outperform over a 30 year period? Have you considered what it would be like to hold a fund that gets outperformed by everything else, could be 20% lower every year for more than a decade, and still believe in it and hold onto it? Because that's what it's like for microcaps and small cap value. It's possible that after the studies were published that everybody bid up the prices of small cap value and the microcaps, so the expected return has been arbitraged away. It is possible that in 30 years, you will be wrong and the price won't be higher (it's called "risk" for a reason.) It's possible that the microcap and small cap advantage has been overstated by a single period of outperformance in the data. Or it might pan out and it will be higher.

If you invest in small caps or microcaps, make sure you do it with your eyes open. Limit your bets so you don't lose the farm. Write down what your strategy is so that you don't go back on it later and wonder why you every bought that dog in the first place.

Disclosure: I own REIT, small cap, and small cap value index funds.

[secondopinion]

My taxable account managed by my former financial advisor has two real estate funds, REET and DFGEX. I read in “The Four Pillars of Investing” and a book by Rob Berger that REIT’s can generate lots of taxes. Should I consider selling them?

REITs, as some of the posters have commented, are not terrible in the sense of how the income is taxed.

It is more of a question whether you want to hold more REITs than the market; the taxes are secondary in all honesty. As someone who has a large taxable account in comparison to my tax-advantaged, I would not push REITs out of the taxable account. Maybe they rank 3 out of 5 stars (in my mind) as far as tax efficiency, but I can think of other classes of companies that are far worse. And with yields of bonds as they are, REITs are more efficient than essentially every bond.

[LongMoney]

REIT in taxable is the equivalent of leaving a sports car out in the snow/salt.

Roth would protect REIT dividends from tax obviously. REIT dividends in a regular brokerage will otherwise be taxed. The downside to putting it in a Roth is that it uses up valuable space that can be allocated to higher risk/reward alternatives. REIT in Roth could be beneficial if you have a dividend portfolio and youre retired or close to it. Just my .02 anyway

[grok87]

REIT in taxable is the equivalent of leaving a sports car out in the snow/salt.

Roth would protect REIT dividends from tax obviously. REIT dividends in a regular brokerage will otherwise be taxed. The downside to putting it in a Roth is that it uses up valuable space that can be allocated to higher risk/reward alternatives. REIT in Roth could be beneficial if you have a dividend portfolio and youre retired or close to it. Just my .02 anyway

nah. reit yields are pretty low these days. see this post for example.
viewtopic.php?t=400082

[Aged Maduro]

It depends on what percentage of your taxable investment account they comprise. I have about 5% of my taxable investment account allocated to REITs and i don't worry about it. That is about the same market weighting to commercial real estate that you will find in most total stock index funds. Bonds also aren't tax efficient within a taxable investment account but it is still wise to hold at least hold some bonds within a taxable investment account for risk management, liquidity and rebalancing. That being said, REITs are ideally suited within Roth accounts IF you have the Roth space available to make it worthwhile. I keep it simple and just fill up my Roth accounts with a targe date retirement fund. So across the board, within both my taxable and Roth accounts i am holding about 5% in REITs as my Charles Schwab target date fund (SWYJX) also contains about 5% in REITs.

[bshnew]

I haven't found a microcap fund that I liked. I think small cap is good enough. However, there is a more fundamental question that you have to ask yourself -- were you attracted to those funds because the books (and studies) reported that they outperform over a 30 year period? Have you considered what it would be like to hold a fund that gets outperformed by everything else, could be 20% lower every year for more than a decade, and still believe in it and hold onto it? Because that's what it's like for microcaps and small cap value. It's possible that after the studies were published that everybody bid up the prices of small cap value and the microcaps, so the expected return has been arbitraged away. It is possible that in 30 years, you will be wrong and the price won't be higher (it's called "risk" for a reason.) It's possible that the microcap and small cap advantage has been overstated by a single period of outperformance in the data. Or it might pan out and it will be higher.

If you invest in small caps or microcaps, make sure you do it with your eyes open. Limit your bets so you don't lose the farm. Write down what your strategy is so that you don't go back on it later and wonder why you every bought that dog in the first place.

Disclosure: I own REIT, small cap, and small cap value index funds.



This was really helpful. Thank you for the cogent reply. So you think having a fund for small cap AND small cap value is worthwhile? Here is how I'm thinking of re-designing my Roth once it's de-linked from my financial planner. I haven't yet ironed out percentages.

Total US market index
Small cap value index

Total international index
Emerging market index

REIT

[Gaston]

I haven't found a microcap fund that I liked. I think small cap is good enough. However, there is a more fundamental question that you have to ask yourself -- were you attracted to those funds because the books (and studies) reported that they outperform over a 30 year period? Have you considered what it would be like to hold a fund that gets outperformed by everything else, could be 20% lower every year for more than a decade, and still believe in it and hold onto it? Because that's what it's like for microcaps and small cap value. It's possible that after the studies were published that everybody bid up the prices of small cap value and the microcaps, so the expected return has been arbitraged away. It is possible that in 30 years, you will be wrong and the price won't be higher (it's called "risk" for a reason.) It's possible that the microcap and small cap advantage has been overstated by a single period of outperformance in the data. Or it might pan out and it will be higher.

If you invest in small caps or microcaps, make sure you do it with your eyes open. Limit your bets so you don't lose the farm. Write down what your strategy is so that you don't go back on it later and wonder why you every bought that dog in the first place.

Well said.

[wolf359]

This was really helpful. Thank you for the cogent reply. So you think having a fund for small cap AND small cap value is worthwhile? Here is how I'm thinking of re-designing my Roth once it's de-linked from my financial planner. I haven't yet ironed out percentages.

Total US market index
Small cap value index

Total international index
Emerging market index

REIT

If you're asking for my opinion, you're doing it wrong. You need to have such a firm belief in your selection that you will hold onto it year after year with it underperforming everything else, and everyone is advising you to drop it. You need to know WHY this strategy will work in the end, and what you will do if it doesn't. And you need to write it down. Do you know of any decision you made 20 years ago, and exactly why you made that decision? You won't on this one unless you write it down.

My why for holding both isn't outperformance. It's diversification. Both small cap and small cap value are volatile. That means to say that in times like these when the market is down, they're both WAY DOWN. However, when they recover, they recover differently. Having both means that my overall portfolio has greater stability.

Most of the time small cap outperforms small cap value, except for the times that it doesn't. It's easier for me to hold on to both than it is to just use one. I just like the way they perform together, and it makes me more likely to hold them for the long term.

[White Coat Investor]

Hi Bogleheads,

My taxable account managed by my former financial advisor has two real estate funds, REET and DFGEX. I read in “The Four Pillars of Investing” and a book by Rob Berger that REIT’s can generate lots of taxes. Should I consider selling them?

An unrelated question: Do any of you use microcap funds, or do you think a small cap value fund is sufficient?

Brooke

Be aware there was no 199A deduction when The Four PIllars of Investing was first published. REITs are slightly more tax efficient than they used to be. Some of their distributions are "return of principal" (basically this is how REITS pass depreciation on to you). Bottom line: They're not as tax-inefficient as a lot of Bogleheads think. Certainly you shouldn't move your REITs into taxable before TSM, TISM etc. but it's not the end of the world to own them in taxable.

Used to have microcap and small value. Ended up simplifying my mutual funds by dropping some asset classes including microcap. Typical choices are BRSIX and IWC.

[Taylor Larimore]

Bogleheads:

Personally, I would not hold individual REIT stocks in a solo taxable account or elsewhere. This from Morningstar:

REITs and REIT funds: 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 investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year. Moreover, their dividends typically count as nonqualified, meaning that they're taxed at higher ordinary income tax rates versus the lower tax rates that apply to qualified dividends.

Total Market Index Funds hold the market weight in REIT's in one tax-efficient and low-cost fund.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Don't look for the needle in the haystack. Just buy the haystack!"

[bshnew]

On the topic of REIT’s, what are your thoughts on global vs. US REIT funds? I’ve been trying to read past posts on this forum about the Vanguard and Schwab REIT ETF’s, VNQ and SCHH. Then I noticed that Vanguard has a global REIT, VNQI.

I think my tendency in investing is to make perfect the enemy of good!