The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
arcticpineapplecorp.
Posts: 3652
Joined: Tue Mar 06, 2012 9:22 pm

The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by arcticpineapplecorp. » Wed Sep 26, 2018 8:32 pm

appologize if this has been posted already, feel free to merge. Interesting article about how REITs fall under the new preferential tax treatment of real estate under the tax code passed at the end of last year. Article discusses the amount of benefit of deduction, especially for those higher(est) earners:
Under the Tax Cuts and Jobs Act of 2017, though, REITs have been afforded a new tax preference: the IRC Section 199A deduction for “pass-through” businesses, that allows for a 20% deduction of any qualified REIT dividends against that very income, resulting in an effective 20% reduction in the tax rate on REITs (where the top 37% tax rate becomes “just” 29.6% instead).
Obviously this only is relevant for REITs in taxable (to qualify for additional tax deductions, which is generally not advised because of the way that REITS distribute a high proportion of income as dividends:
Specifically, as a result of the Section 199A deduction, it is now more preferable to hold REITs in taxable accounts than in prior years (as the QBI deduction is lost if the REITs are held in a tax-deferred account). Notably though, depending on an investor’s asset mix, and the yield and turnover of other investments within the total portfolio, the optimal location for an investor’s REITs may still be their IRA, Roth IRAs or other tax-preferred accounts.
source: https://www.kitces.com/blog/reit-real-e ... d-57089989[/quote]

feel free to discuss.
"Invest we must" | "By God, If John Q. Public doesn't get the word after two Swedroe books, two (Bill) Bernstein books, and four Bogle books, he (she) has only himself to blame!"

stlutz
Posts: 4939
Joined: Fri Jan 02, 2009 1:08 am

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by stlutz » Wed Sep 26, 2018 9:01 pm

Was there ever resolution to the question of whether REIT mutual funds/ETFs qualified for the favorable tax treatment?

danaht
Posts: 556
Joined: Sun Oct 18, 2015 11:28 am

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by danaht » Wed Sep 26, 2018 10:10 pm

stlutz wrote:
Wed Sep 26, 2018 9:01 pm
Was there ever resolution to the question of whether REIT mutual funds/ETFs qualified for the favorable tax treatment?
My understanding is that the 199A 20% tax deduction benefit will only apply for individual REITs and will not apply for the funds (REIT mutual funds or ETFs).

User avatar
White Coat Investor
Posts: 13654
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by White Coat Investor » Wed Sep 26, 2018 10:52 pm

Still less tax efficient than stocks, I see no reason to change the asset location of REITs.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

grok87
Posts: 8559
Joined: Tue Feb 27, 2007 9:00 pm

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by grok87 » Sun Oct 14, 2018 10:06 am

danaht wrote:
Wed Sep 26, 2018 10:10 pm
stlutz wrote:
Wed Sep 26, 2018 9:01 pm
Was there ever resolution to the question of whether REIT mutual funds/ETFs qualified for the favorable tax treatment?
My understanding is that the 199A 20% tax deduction benefit will only apply for individual REITs and will not apply for the funds (REIT mutual funds or ETFs).
yep, that is my understanding as well. i'm considering buying individual reits in a taxable account to create more room for my tips ladder in my tax-advantaged accounts.

here is a link showing greenstreets view that reits are trading at about 5% below NAV and 7% below fair value
https://www.greenstreetadvisors.com/insights/avgpremnav
cheers,
grok
RIP Mr. Bogle.

User avatar
BruceM
Posts: 1839
Joined: Fri Aug 08, 2008 1:09 pm
Location: Manzanita, Oregon

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by BruceM » Mon Oct 15, 2018 10:57 am

Since the late 90's I created my own REIT mutual fund, currently holding 21 Equity REITs, including preferred stock, in a taxable account. This provides a large part of our required household income.

Needless to say, Sec. 199A will be a windfall to those who do what I do. But the challenge here is to estimate what the deduction will be. Here's what I've found so far, after reading this article a couple of weeks ago and speaking with a couple of the IR reps at the REITs I hold....

The Qualifying Business Income is not the REIT dividend....for most, it will only be part of it. The shareholder must reduce the dividend by any capital gains or "Non-Dividend" (read: Return of Capital) that is part of the dividend, as well as any 'qualified dividend' (box 1b of the 1099-DIV). But even this amount may not be the 199A distribution, as QBI must be income from business operations and cannot include things like proceeds for settlements, investment income (interest and dividends) or other non-business income. The IR I spoke to couldn't say how much of the ordinary income will be 199A qualifying, only that it will be a major part of it. This is just a wag, but I'd imagine 90 - 100%.

The other good news is that there is no AGI phase out for taking the 20% deduction as there is for small business, who must include REIT 199A dividends in with QBI of the pass through business and so may lose the 20% deduction if theirs is a service business and their AGI exceeds the phaseout limit....at least as I understand it.

So to get some idea of how much of a deduction I'll qualify for, I looked at the % of REIT dividends that were net ordinary income, multiply this % by expected 2018 dividends, multiplied this by 95% and then took 20% of that, which gives me an estimate of about $3,500 - $4000 deduction. I'm not going to adjust my quarterly estimated payment, as I want to see how this goes the first time.

You can look at last year's 1099-DIV or go to NAREIT's web site and find the 1099-DIV data for a REIT you've purchased to get an idea of the likely tax character of their distribution this year. As a general rule, the healthier the REIT, the more likely the dividend will be 100% ordinary income (PSA is a good example), and for some REITs, REIT Taxable Income is distributed first to preferred stock and any capital gains or ROC are paid to common shareholders...although I've found this can vary by REIT.

https://www.irs.gov/newsroom/tax-cuts-a ... ction-faqs

BruceM

grok87
Posts: 8559
Joined: Tue Feb 27, 2007 9:00 pm

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by grok87 » Tue Oct 16, 2018 6:10 am

BruceM wrote:
Mon Oct 15, 2018 10:57 am
Since the late 90's I created my own REIT mutual fund, currently holding 21 Equity REITs, including preferred stock, in a taxable account. This provides a large part of our required household income.

Needless to say, Sec. 199A will be a windfall to those who do what I do. But the challenge here is to estimate what the deduction will be. Here's what I've found so far, after reading this article a couple of weeks ago and speaking with a couple of the IR reps at the REITs I hold....

The Qualifying Business Income is not the REIT dividend....for most, it will only be part of it. The shareholder must reduce the dividend by any capital gains or "Non-Dividend" (read: Return of Capital) that is part of the dividend, as well as any 'qualified dividend' (box 1b of the 1099-DIV). But even this amount may not be the 199A distribution, as QBI must be income from business operations and cannot include things like proceeds for settlements, investment income (interest and dividends) or other non-business income. The IR I spoke to couldn't say how much of the ordinary income will be 199A qualifying, only that it will be a major part of it. This is just a wag, but I'd imagine 90 - 100%.

The other good news is that there is no AGI phase out for taking the 20% deduction as there is for small business, who must include REIT 199A dividends in with QBI of the pass through business and so may lose the 20% deduction if theirs is a service business and their AGI exceeds the phaseout limit....at least as I understand it.

So to get some idea of how much of a deduction I'll qualify for, I looked at the % of REIT dividends that were net ordinary income, multiply this % by expected 2018 dividends, multiplied this by 95% and then took 20% of that, which gives me an estimate of about $3,500 - $4000 deduction. I'm not going to adjust my quarterly estimated payment, as I want to see how this goes the first time.

You can look at last year's 1099-DIV or go to NAREIT's web site and find the 1099-DIV data for a REIT you've purchased to get an idea of the likely tax character of their distribution this year. As a general rule, the healthier the REIT, the more likely the dividend will be 100% ordinary income (PSA is a good example), and for some REITs, REIT Taxable Income is distributed first to preferred stock and any capital gains or ROC are paid to common shareholders...although I've found this can vary by REIT.

https://www.irs.gov/newsroom/tax-cuts-a ... ction-faqs

BruceM
Thanks for The detailed post, very helpful.

It all sounds fraught wiTh Potential for tax reporting screwups on the part of the reits. I’m considering buying individual reits in taxable as you have done, partly to capture these tax benefits and partly to create more room in my tax-advantaged accounts for my retirement tips ladder. But i’m Wondering if I should wait a year or so till the reits get all the new tax reporting kinks worked out.

Have you ever had to file amended tax returns because of mis-reporting by the reits before?
RIP Mr. Bogle.

User avatar
BruceM
Posts: 1839
Joined: Fri Aug 08, 2008 1:09 pm
Location: Manzanita, Oregon

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by BruceM » Tue Oct 16, 2018 10:31 am

Have you ever had to file amended tax returns because of mis-reporting by the reits before?
I haven't, but for many, yes, that used to be quite common many years ago. My brokerage (Fidelity) would send out the 1099-DIV summary in late February, and then send out one, two or even three amended 1099-DIVs as some REITs would correct their own 1099s. So a few years ago, Fidelity sent out notice that their 1099-DIV would come out in mid to late March. Since then, they have not sent out an updated 1099-DIV.

I generally owe a balance when I file so I typically delay filing until the second week of April anyway. But for those who get refunds each year and who want to file sooner than later, this could be an issue. This will be particularly true for 2018, as not only is the Sec. 199A new, but some REITs in anticipation of it that have dividend record dates at the end of December, delayed the dividend Record Date to the first week of January so the dividend will be reported as paid in 2018 instead of Dec 2017, so the REIT will have paid 5 dividends in 2018 instead of 4.

BruceM

grok87
Posts: 8559
Joined: Tue Feb 27, 2007 9:00 pm

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by grok87 » Tue Oct 16, 2018 7:17 pm

BruceM wrote:
Tue Oct 16, 2018 10:31 am
Have you ever had to file amended tax returns because of mis-reporting by the reits before?
I haven't, but for many, yes, that used to be quite common many years ago. My brokerage (Fidelity) would send out the 1099-DIV summary in late February, and then send out one, two or even three amended 1099-DIVs as some REITs would correct their own 1099s. So a few years ago, Fidelity sent out notice that their 1099-DIV would come out in mid to late March. Since then, they have not sent out an updated 1099-DIV.

I generally owe a balance when I file so I typically delay filing until the second week of April anyway. But for those who get refunds each year and who want to file sooner than later, this could be an issue. This will be particularly true for 2018, as not only is the Sec. 199A new, but some REITs in anticipation of it that have dividend record dates at the end of December, delayed the dividend Record Date to the first week of January so the dividend will be reported as paid in 2018 instead of Dec 2017, so the REIT will have paid 5 dividends in 2018 instead of 4.

BruceM
thanks
RIP Mr. Bogle.

travelogue
Posts: 93
Joined: Sat Aug 12, 2017 4:29 pm

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by travelogue » Tue Jan 08, 2019 1:45 pm

Is the analysis still the same for the lack of tax law change benefits for REIT funds and ETFs vs individual REITs in taxable?

Edit:

I’ve been reading some of the Nareit materials on the treatment of mutual funds under 199A.

https://www.reit.com/nareit/advocacy/po ... ess-income

Still not clear, though — were final rules adopted disallowing the 199A deduction by mutual fund holders?

Second Edit:

This posting seems to indicate proposed regs *do* contemplate allowing “mutual fund” REIT owners to take advatange of at least some portion of the 199A deduction.

https://www.currentfederaltaxdevelopmen ... for-review
The proposed regulations are to contain proposed rules that apparently will allow, at least in some cases, REIT income qualified for the §199A deduction to flow through mutual funds, allowing the mutual fund investors the 20% deduction.

grok87
Posts: 8559
Joined: Tue Feb 27, 2007 9:00 pm

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by grok87 » Sat Jan 12, 2019 10:00 am

travelogue wrote:
Tue Jan 08, 2019 1:45 pm
Is the analysis still the same for the lack of tax law change benefits for REIT funds and ETFs vs individual REITs in taxable?

Edit:

I’ve been reading some of the Nareit materials on the treatment of mutual funds under 199A.

https://www.reit.com/nareit/advocacy/po ... ess-income

Still not clear, though — were final rules adopted disallowing the 199A deduction by mutual fund holders?

Second Edit:

This posting seems to indicate proposed regs *do* contemplate allowing “mutual fund” REIT owners to take advatange of at least some portion of the 199A deduction.

https://www.currentfederaltaxdevelopmen ... for-review
The proposed regulations are to contain proposed rules that apparently will allow, at least in some cases, REIT income qualified for the §199A deduction to flow through mutual funds, allowing the mutual fund investors the 20% deduction.
thanks that's interesting. watch this space is suppose.
RIP Mr. Bogle.

grok87
Posts: 8559
Joined: Tue Feb 27, 2007 9:00 pm

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by grok87 » Sat Jan 19, 2019 11:15 am

grok87 wrote:
Sat Jan 12, 2019 10:00 am
travelogue wrote:
Tue Jan 08, 2019 1:45 pm
Is the analysis still the same for the lack of tax law change benefits for REIT funds and ETFs vs individual REITs in taxable?

Edit:

I’ve been reading some of the Nareit materials on the treatment of mutual funds under 199A.

https://www.reit.com/nareit/advocacy/po ... ess-income

Still not clear, though — were final rules adopted disallowing the 199A deduction by mutual fund holders?

Second Edit:

This posting seems to indicate proposed regs *do* contemplate allowing “mutual fund” REIT owners to take advatange of at least some portion of the 199A deduction.

https://www.currentfederaltaxdevelopmen ... for-review
The proposed regulations are to contain proposed rules that apparently will allow, at least in some cases, REIT income qualified for the §199A deduction to flow through mutual funds, allowing the mutual fund investors the 20% deduction.
thanks that's interesting. watch this space is suppose.
just read in the nytimes that the final regs will let reit mutual fund shareholders who hold in taxable accounts get the deduction. awesome news!

see page 6 of this link
https://www.irs.gov/pub/irs-drop/reg-134652-18.pdf
i think RIC = mutual fund


and here
https://home.treasury.gov/news/press-releases/sm589
wrote: wrote:
The Treasury issued further related proposed regulations that provide further certainty for determining the deduction for REIT dividends taxpayers own through mutual funds and a proposed revenue procedure providing a safe harbor, so that certain rental real estate enterprises may be treated as a trade or business for purposes of the deduction.
cheers,

cheers,
grok
RIP Mr. Bogle.

travelogue
Posts: 93
Joined: Sat Aug 12, 2017 4:29 pm

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by travelogue » Sun Jan 20, 2019 11:32 pm

This is good news. I'd collect some more sources on this.

Here's an additional data point:
https://fitaxguy.com/section-199a-examples-and-lessons/
The IRS and Treasury issued proposed regulations allowing taxpayers to claim the Section 199A with respect to dividends received from mutual funds and ETFs, so long as the mutual fund/ETF passes onto its own shareholders a qualifying dividend from a real estate investment trust (a “REIT”).

This is a welcome change from the previously issued proposed regulations, which provided that dividends received directly from a REIT itself qualified for the Section 199A deduction but dividends from mutual funds and ETFs that owned REITs did not qualify for the deduction. In another positive development, the IRS and Treasury stated that taxpayers can rely upon the rule in the proposed regulations for the time being.

To qualify a REIT mutual fund dividend for the Section 199A deduction, the financial institution must provide the shareholder written documentation providing for the percentage of dividends received from the mutual fund/ETF that qualifies for the Section 199A deduction.

The Section 199A deduction is relatively generous with respect to REIT dividends, since (i) taxpayers do not have to be in any trade or business to qualify, (ii) there are no taxable income limitations on the ability to claim a full Section 199A deduction with respect to REIT dividends, and (iii) computationally, taxpayers will usually wind up with a full 20% deduction, which is true regardless of whether they have QBI loss from trades or businesses.

travelogue
Posts: 93
Joined: Sat Aug 12, 2017 4:29 pm

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by travelogue » Mon Jan 21, 2019 9:11 am

Well, this looks fairly authoritative and definitive. (Nareit testified regarding the rule making and has been closely involved with he process.)
Today the Treasury Department released Proposed Regulations related to the 20% deduction for certain business income enacted in the 2017 tax reform bill. The Proposed Regulations confirm that the section 199A 20% deduction applies to Qualified REIT Dividends received by mutual fund shareholders. The timing of this guidance is significant for the preparers of Forms 1099-Div which are due to shareholders in a matter of weeks. New box 5 on the 2019 Form 1099-Div is specifically designated for section 199A dividends, including Qualified REIT Dividends to direct REIT shareholders and which Treasury, through the Proposed Regulations, has now confirmed includes those mutual fund dividends that are properly treated as Qualified REIT Dividends. Taxpayers may rely on the Proposed Regulations until final regulations are published.
https://www.reit.com/news/blog/nareit-d ... ified-reit

Good news for those owning REIT funds in taxable accounts. Does this change anyone's view of AA options in taxable portfolios?

SRenaeP
Posts: 797
Joined: Tue Jan 19, 2010 9:05 pm

Re: The Section 199A Tax Benefits Of REITs Over Direct Real Estate Investments at Kitces.com by Jeffrey Levine

Post by SRenaeP » Mon Jan 21, 2019 10:56 am

travelogue wrote:
Mon Jan 21, 2019 9:11 am
Well, this looks fairly authoritative and definitive. (Nareit testified regarding the rule making and has been closely involved with he process.)
Today the Treasury Department released Proposed Regulations related to the 20% deduction for certain business income enacted in the 2017 tax reform bill. The Proposed Regulations confirm that the section 199A 20% deduction applies to Qualified REIT Dividends received by mutual fund shareholders. The timing of this guidance is significant for the preparers of Forms 1099-Div which are due to shareholders in a matter of weeks. New box 5 on the 2019 Form 1099-Div is specifically designated for section 199A dividends, including Qualified REIT Dividends to direct REIT shareholders and which Treasury, through the Proposed Regulations, has now confirmed includes those mutual fund dividends that are properly treated as Qualified REIT Dividends. Taxpayers may rely on the Proposed Regulations until final regulations are published.
https://www.reit.com/news/blog/nareit-d ... ified-reit

Good news for those owning REIT funds in taxable accounts. Does this change anyone's view of AA options in taxable portfolios?
Given this, does it make sense to start buying REITs in taxable? I currently hold VGSLX in my Roth IRA but am willing to re-jigger my portfolio if it makes sense.

Post Reply