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

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arcticpineapplecorp.
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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.
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stlutz
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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
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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).

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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.
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grok87
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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
Keep calm and Boglehead on. KCBO.

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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
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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?
Keep calm and Boglehead on. KCBO.

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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
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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
Keep calm and Boglehead on. KCBO.

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