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: 4260
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.
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

stlutz
Posts: 5223
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: 596
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: 14090
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: 8777
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: 1842
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: 8777
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: 1842
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: 8777
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.

User avatar
travelogue
Posts: 224
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: 8777
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: 8777
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.

User avatar
travelogue
Posts: 224
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.

User avatar
travelogue
Posts: 224
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: 922
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.

User avatar
travelogue
Posts: 224
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 22, 2019 9:35 pm

Unsure if this is helpful or accurate, but here's a 199A deduction calculator: https://bradfordtaxinstitute.com/Tools/199A-Calculator/

User avatar
travelogue
Posts: 224
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 22, 2019 10:59 pm

Adding another data point, a client note from Willkie Farr & Gallagher LLP:
Proposed Regulations Allow Mutual Funds and ETFs to Pass Through 20% Deduction for REIT Dividends

Regulations released on January 18, 2019, permit mutual funds and exchange-traded funds taxed as regulated investment companies (“RICs”) to pass through to their shareholders the special treatment of dividends received from real estate investment trusts (“REITs”). RICs may rely on these regulations, even though only in proposed form, for 2018 Forms 1099 that will soon be sent to shareholders.
https://www.willkie.com/~/media/Files/P ... idends.pdf

hirlaw
Posts: 312
Joined: Tue Sep 29, 2009 10:20 am

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

Post by hirlaw » Tue Jan 22, 2019 11:34 pm

One issue may be that Vanguard recently changed its "REIT" funds/ETFs to allow them to hold non-REIT real estate equities. I suppose the fund will issue some type of statement breaking out the REIT vs. non-REIT dividends?

User avatar
travelogue
Posts: 224
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 » Wed Jan 23, 2019 9:16 am

hirlaw wrote:
Tue Jan 22, 2019 11:34 pm
One issue may be that Vanguard recently changed its "REIT" funds/ETFs to allow them to hold non-REIT real estate equities. I suppose the fund will issue some type of statement breaking out the REIT vs. non-REIT dividends?
There's a new Box 5 on the 1099-DIV for qualified 199A income, which is the portion of amounts in Box 1a eligible for the Qualified Business Income Deduction. I would assume non-REIT equities might be eligible to distribute qualified dividends, which would be reported in Box 1b.

grok87
Posts: 8777
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 » Wed Jan 23, 2019 8:15 pm

I am moving my vanguard reit index to taxable.
It gives me more room to hold tips in tax deferred as part of my liability matching portfolio. My only concern is that i have heard from other posters here that sometimes reits screw up the tax reporting and that may trigger the need to refile a corrected tax return.
RIP Mr. Bogle.

User avatar
grabiner
Advisory Board
Posts: 24821
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

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

Post by grabiner » Wed Jan 23, 2019 8:30 pm

grok87 wrote:
Wed Jan 23, 2019 8:15 pm
I am moving my vanguard reit index to taxable.
It gives me more room to hold tips in tax deferred as part of my liability matching portfolio. My only concern is that i have heard from other posters here that sometimes reits screw up the tax reporting and that may trigger the need to refile a corrected tax return.
I still wouldn't recommend that. Even with only 80% of the REIT income taxable, the taxable part is still all non-qualified dividends, and there will also be capital-gains tax when you sell. TIPS dividends are also non-qualified but exempt from state tax, and TIPS funds should have very little in capital gains.
Wiki David Grabiner

User avatar
travelogue
Posts: 224
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 » Wed Jan 23, 2019 8:43 pm

Yes, you should definitely run the numbers -- 80% of REIT dividends under your marginal tax rate could still be quite a drag. If you are holding in taxable, however (for whatever reason), it'll be better to have the 20% deduction than not.

grok87
Posts: 8777
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 » Wed Jan 23, 2019 8:55 pm

grabiner wrote:
Wed Jan 23, 2019 8:30 pm
grok87 wrote:
Wed Jan 23, 2019 8:15 pm
I am moving my vanguard reit index to taxable.
It gives me more room to hold tips in tax deferred as part of my liability matching portfolio. My only concern is that i have heard from other posters here that sometimes reits screw up the tax reporting and that may trigger the need to refile a corrected tax return.
I still wouldn't recommend that. Even with only 80% of the REIT income taxable, the taxable part is still all non-qualified dividends, and there will also be capital-gains tax when you sell. TIPS dividends are also non-qualified but exempt from state tax, and TIPS funds should have very little in capital gains.
Thanks grabiner. I guess I will take your advice and runs the numbers. I’d be interested in your thoughts on this seeking alpha post.
https://www.google.com/amp/s/seekingalp ... le-account
Cheers,
Grok
RIP Mr. Bogle.

grok87
Posts: 8777
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 » Wed Jan 23, 2019 8:57 pm

travelogue wrote:
Wed Jan 23, 2019 8:43 pm
Yes, you should definitely run the numbers -- 80% of REIT dividends under your marginal tax rate could still be quite a drag. If you are holding in taxable, however (for whatever reason), it'll be better to have the 20% deduction than not.
Thanks
I think the yield of reits isn’t all that different from that of total stock market according to vanguard?
RIP Mr. Bogle.

User avatar
grabiner
Advisory Board
Posts: 24821
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

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

Post by grabiner » Wed Jan 23, 2019 9:07 pm

grok87 wrote:
Wed Jan 23, 2019 8:55 pm
grabiner wrote:
Wed Jan 23, 2019 8:30 pm
grok87 wrote:
Wed Jan 23, 2019 8:15 pm
I am moving my vanguard reit index to taxable.
It gives me more room to hold tips in tax deferred as part of my liability matching portfolio. My only concern is that i have heard from other posters here that sometimes reits screw up the tax reporting and that may trigger the need to refile a corrected tax return.
I still wouldn't recommend that. Even with only 80% of the REIT income taxable, the taxable part is still all non-qualified dividends, and there will also be capital-gains tax when you sell. TIPS dividends are also non-qualified but exempt from state tax, and TIPS funds should have very little in capital gains.
Thanks grabiner. I guess I will take your advice and runs the numbers. I’d be interested in your thoughts on this seeking alpha post.
https://www.google.com/amp/s/seekingalp ... le-account
Cheers,
Grok
You have to work out the numbers with distributions.

A return-of-capital distribution is essentially neutral. If you have $10,000 invested, receive $200 in return of capital, and reinvest that $200 in additional shares, you still have $10,000 invested with a basis of $10,000. (The distribution is useful if you are spending the distributions, as you don't have to sell for a capital gain.) Thus the tax cost should be computed from the dividend and capital gain distributions.

Checking Vanguard REIT Index Tax Distributions on the wiki, it looks like the yield is historically around 3% with a small amount of distributed capital gains. If you are in a 24% bracket, you would pay 24% tax on 80% of the dividend, which is 0.58%, and the present-value cost of future capital gains is likely about 0.30% (estimated as in When to prefer low-rate bonds to stocks in taxable) For comparison, if a TIPS fund yields 3% (typical with a 1% yield and 2% inflation), you would pay 0.72%, but no capital-gains tax. And that is before any state tax; if you pay 6% state tax, the TIPS costs no more, but the REIT fund costs 0.76% now and also costs more in capital gains if you retire in the same state.

In addition, the Section 199A deduction is scheduled to expire in 2026; if it does and you hold REITs in a taxable account, you'll have to pay the higher tax bill unless you sell, likely for a capital gain.
Wiki David Grabiner

grok87
Posts: 8777
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 » Thu Jan 24, 2019 5:51 am

grabiner wrote:
Wed Jan 23, 2019 9:07 pm
grok87 wrote:
Wed Jan 23, 2019 8:55 pm
grabiner wrote:
Wed Jan 23, 2019 8:30 pm
grok87 wrote:
Wed Jan 23, 2019 8:15 pm
I am moving my vanguard reit index to taxable.
It gives me more room to hold tips in tax deferred as part of my liability matching portfolio. My only concern is that i have heard from other posters here that sometimes reits screw up the tax reporting and that may trigger the need to refile a corrected tax return.
I still wouldn't recommend that. Even with only 80% of the REIT income taxable, the taxable part is still all non-qualified dividends, and there will also be capital-gains tax when you sell. TIPS dividends are also non-qualified but exempt from state tax, and TIPS funds should have very little in capital gains.
Thanks grabiner. I guess I will take your advice and runs the numbers. I’d be interested in your thoughts on this seeking alpha post.
https://www.google.com/amp/s/seekingalp ... le-account
Cheers,
Grok
You have to work out the numbers with distributions.

A return-of-capital distribution is essentially neutral. If you have $10,000 invested, receive $200 in return of capital, and reinvest that $200 in additional shares, you still have $10,000 invested with a basis of $10,000. (The distribution is useful if you are spending the distributions, as you don't have to sell for a capital gain.) Thus the tax cost should be computed from the dividend and capital gain distributions.

Checking Vanguard REIT Index Tax Distributions on the wiki, it looks like the yield is historically around 3% with a small amount of distributed capital gains. If you are in a 24% bracket, you would pay 24% tax on 80% of the dividend, which is 0.58%, and the present-value cost of future capital gains is likely about 0.30% (estimated as in When to prefer low-rate bonds to stocks in taxable) For comparison, if a TIPS fund yields 3% (typical with a 1% yield and 2% inflation), you would pay 0.72%, but no capital-gains tax. And that is before any state tax; if you pay 6% state tax, the TIPS costs no more, but the REIT fund costs 0.76% now and also costs more in capital gains if you retire in the same state.

In addition, the Section 199A deduction is scheduled to expire in 2026; if it does and you hold REITs in a taxable account, you'll have to pay the higher tax bill unless you sell, likely for a capital gain.
Thanks David.
As per this link
https://personal.vanguard.com/us/FundsY ... undId=0123
The unadjusted yield of Vang reit index is 3.64%. Vanguard estimates an adjusted yield of 2.36%
https://personal.vanguard.com/us/FundsY ... undId=0123
It’s a good point about the tax law expiring in 2026. I guess I am choosing to ignore that.

I guess the way I look at it the new tax law levels the playing field between reits and total stock market. Do you think that’s fair? Fair-ish?

One specific point- if I hold reits in taxable I will eventually be taxed on “return of capital” at long term capital gains rates. If I hold in traditional ira then it will be taxed at ordinary income rates- fair?
RIP Mr. Bogle.

User avatar
grabiner
Advisory Board
Posts: 24821
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

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

Post by grabiner » Thu Jan 24, 2019 8:05 pm

grok87 wrote:
Thu Jan 24, 2019 5:51 am
One specific point- if I hold reits in taxable I will eventually be taxed on “return of capital” at long term capital gains rates. If I hold in traditional ira then it will be taxed at ordinary income rates- fair?
This applies to any investment with capital gains, not just REITs; return-of-capital distributions are tax-neutral. If you buy a share of a mutual fund for $60 and sell it for $100, you have $60 in return of capital, and $40 in capital gains. If a REIT has distributed $20 return-of-capital on that share and you reinvested those distributions, you still have a $60 basis even though you have invested $80, so you still have $40 in capital gains when you sell for $100.

It makes more sense to place assets based on relative tax efficiency. Every investment loses the same percentage of its value in a traditional IRA, and none of its value in a Roth IRA, so it doesn't matter much what you put in one or the other. Some investments lose more to taxes in a taxable account than others, so you should prefer to hold those in an IRA.
Wiki David Grabiner

not4me
Posts: 638
Joined: Thu May 25, 2017 3:08 pm

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

Post by not4me » Fri Jan 25, 2019 2:16 pm

grok87 wrote:
Thu Jan 24, 2019 5:51 am


One specific point- if I hold reits in taxable I will eventually be taxed on “return of capital” at long term capital gains rates. If I hold in traditional ira then it will be taxed at ordinary income rates- fair?
I wouldn't have thought it necessary to say this, but will based on some other posts I've read....

Your point is right about being taxed at long term capital gains rate IF you sell. However, if you don't sell, then it isn't taxed. Think in terms of step-up in basis, or itemized charitable deduction...The Traditional IRA will be taxed at ordinary rates -- even if inherited -- when RMD occurs. Since it already defers/eliminates tax, may (or may not!) be best use of ROTH space...

One cautionary note in case this applies for case if there is a lot of return of capital distribution & held a long time...once the cost basis is used up, then you start paying ordinary rates. Still not a higher rate though

grok87
Posts: 8777
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 » Fri Jan 25, 2019 4:24 pm

not4me wrote:
Fri Jan 25, 2019 2:16 pm
grok87 wrote:
Thu Jan 24, 2019 5:51 am


One specific point- if I hold reits in taxable I will eventually be taxed on “return of capital” at long term capital gains rates. If I hold in traditional ira then it will be taxed at ordinary income rates- fair?
I wouldn't have thought it necessary to say this, but will based on some other posts I've read....

Your point is right about being taxed at long term capital gains rate IF you sell. However, if you don't sell, then it isn't taxed. Think in terms of step-up in basis, or itemized charitable deduction...The Traditional IRA will be taxed at ordinary rates -- even if inherited -- when RMD occurs. Since it already defers/eliminates tax, may (or may not!) be best use of ROTH space...

One cautionary note in case this applies for case if there is a lot of return of capital distribution & held a long time...once the cost basis is used up, then you start paying ordinary rates. Still not a higher rate though
Thanks a lot.
Yeah I was thinking About the step up in basis and hing when i wrote the comment but didn’t mention it.
It makes the argument even stronger I think as you point out
RIP Mr. Bogle.

grok87
Posts: 8777
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 » Fri Jan 25, 2019 4:49 pm

So i’m Thinking we need to edit the wiki to reflect the fact that reits are now just as tax efficienct as total stock market
https://www.bogleheads.org/wiki/Tax-eff ... _placement
RIP Mr. Bogle.

User avatar
tooluser
Posts: 419
Joined: Sat Oct 01, 2011 7:04 pm

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

Post by tooluser » Wed Feb 13, 2019 10:23 pm

Personal benchmark of my REITs held in taxable (VNQ, USRT): ~60% of the dividends are now qualified, based on the initial 1099 form. That's a big deal.
The discovery of America, and that of a passage to the East Indies by the Cape of Good Hope, are the two greatest and most important events recorded in the history of mankind. -- Adam Smith, 1776

User avatar
grabiner
Advisory Board
Posts: 24821
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

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

Post by grabiner » Wed Feb 13, 2019 11:35 pm

grok87 wrote:
Fri Jan 25, 2019 4:49 pm
So i’m Thinking we need to edit the wiki to reflect the fact that reits are now just as tax efficienct as total stock market
https://www.bogleheads.org/wiki/Tax-eff ... _placement
They are still less tax-efficient. While only 80% of the dividend is taxable, the taxable dividend is non-qualified, and it is still higher than the yield on Total Stock Market. In addition, the QBI tax deduction is scheduled to expire in 2026, so if you hold REITs in a taxable account, you may be stuck with even less tax-efficient investments or have to sell them for a large capital gain.
Wiki David Grabiner

User avatar
White Coat Investor
Posts: 14090
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 Feb 13, 2019 11:47 pm

grok87 wrote:
Fri Jan 25, 2019 4:49 pm
So i’m Thinking we need to edit the wiki to reflect the fact that reits are now just as tax efficienct as total stock market
https://www.bogleheads.org/wiki/Tax-eff ... _placement
Uh no. I can't imagine they're even close. Especially for someone in the 0% capital gains bracket. I'm leaving my REITs right where they are- in a tax protected account.
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

User avatar
travelogue
Posts: 224
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 Feb 19, 2019 7:29 am

Agree with the esteemed White Coat Investor, but still — if you *do* hold RIETs in taxable, it's good to have an improvement in tax treatment.

User avatar
kramer
Posts: 1699
Joined: Wed Feb 21, 2007 2:28 am
Location: Philippines

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

Post by kramer » Tue Feb 19, 2019 12:49 pm

Is this new 80% tax benefit carried over to a Vanguard ETF like VBR (Vanguard Small Cap Value ETF) which holds a significant quantity of REITs but far less than half. This is my largest taxable holding. If I recall, it was composed of over 10% REITs by market cap meaning that probably around 20% of the ETF's dividend is from REITs (and maybe the majority of non-qualified dividends) ... I wonder if Vanguard will break out the REIT portion of the dividends on the 1099 so that VBR investors can enjoy a (small) tax break?

User avatar
tooluser
Posts: 419
Joined: Sat Oct 01, 2011 7:04 pm

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

Post by tooluser » Wed Feb 20, 2019 10:00 pm

kramer wrote:
Tue Feb 19, 2019 12:49 pm
Is this new 80% tax benefit carried over to a Vanguard ETF like VBR (Vanguard Small Cap Value ETF) which holds a significant quantity of REITs but far less than half. This is my largest taxable holding. If I recall, it was composed of over 10% REITs by market cap meaning that probably around 20% of the ETF's dividend is from REITs (and maybe the majority of non-qualified dividends) ... I wonder if Vanguard will break out the REIT portion of the dividends on the 1099 so that VBR investors can enjoy a (small) tax break?
My experience for TY2018 is no for VBR, yes for USRT and VNQ.
The discovery of America, and that of a passage to the East Indies by the Cape of Good Hope, are the two greatest and most important events recorded in the history of mankind. -- Adam Smith, 1776

User avatar
J G Bankerton
Posts: 1249
Joined: Thu Sep 14, 2017 3:30 pm

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

Post by J G Bankerton » Sat Feb 23, 2019 11:03 am

You guys are good. I just stumbled on Section 199A when I did my 2018 taxes. I like REITs but not the tax treatment. Do I understand correctly that 20% of my REIT dividends are tax free? Is the tax free part included in income for taxing Social Security?


Section 199A dividends
Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.



Is section 199A permanent or does it expire in 2025?

Post Reply