REIT in taxable for income purposes

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SemiRetire
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REIT in taxable for income purposes

Post by SemiRetire »

Was thinking of buying REIT in taxable to get higher dividends payout for spending purposes. (I would like to set aside the total return model for now)
My understanding is that stock dividends are taxed at lower rate than income, say a 15-20 percent dividend tax rate (long term).
I think that bond payments are taxed as income though right?
Long term stock sales are taxed like stock dividends correct?
how about bond sales?

Then I think that REIT payments would be taxed like stock? But that REITS must put out a higher amount like 90 percent of profits or something per year under US REIT law.

Also, as with the recent VWO actually being good in taxable (contrary to opinion here prior), I would assume REIT in taxable is still tax inefficient.

Thanks to anyone who can refresh my understanding of all this. Its been several years since I really was reading on all this, and I am now in early semiretirement, fleshing things out : )
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Re: REIT in taxable for income purposes

Post by KyleAAA »

REIT dividends were previously taxed as normal income. The 2017 tax law modified things somewhat, but in no case would they be taxed like qualified stock dividends. The particulars of your tax situation matter, but you'd probably never come out ahead owning REITs in taxable.

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Re: REIT in taxable for income purposes

Post by anon_investor »

From a tax efficiency standpoint (unless you are in a really low tax bracket - e.g. 12% or less), you would want to hold investments in your taxable account that generate only qualified dividends (or close to only), which would be taxed at the lower long term capital gains tax rate. This generally will be US equity funds (such as a total US stock market fund, VTSAX usually generates 95%+ qualified dividends).
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Re: REIT in taxable for income purposes

Post by veggivet »

REITs would likely be more advantageous if placed in tax-deferred or tax-free retirement accounts, or an HSA account, if you have one.
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Re: REIT in taxable for income purposes

Post by MP123 »

But on a brighter note your REIT dividends would likely qualify for the new 20% sec. 199a QBI deduction.
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Re: REIT in taxable for income purposes

Post by abuss368 »

The dividends of REITs are not the same as common stocks. REITs by law must pay out 90% of their income in the form of dividends. However, the "dividend" is comprised of three points:

1) Dividend
2) Capital Gain
3) Return of capital - your money being returned to you.

Vanguard's website will show the unadjusted dividend as 3.11% or so but this includes capital gains and the return of your own money. Not really apples to apples. Vanguard will also show the adjusted dividend (or true dividend yield) of 2.28%. That yield of 2.28% is not that attractive! I recall years ago how it was double that.

On top of that the dividends is not taxed at the lower qualified rate of 15%. Yes, the new Qualified Business Income deduction will help but most of a REITs return is from dividends rather than capital appreciation.
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Re: REIT in taxable for income purposes

Post by abuss368 »

MP123 wrote: Thu Jan 16, 2020 7:38 pm But on a brighter note your REIT dividends would likely qualify for the new 20% sec. 199a QBI deduction.
Vanguard has a column on the Form 1099-Div with the amount for 199a QBI noted.
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Phineas J. Whoopee
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Re: REIT in taxable for income purposes

Post by Phineas J. Whoopee »

As abuss368 points out, part of the distributions usually are return of capital. That's no different than if the distributions didn't include it, but you sold shares to get the same amount, ignoring capital gains or losses.

I'm not directly answering your question about taxability, but it would be a mistake to think REIT dividends are free money.

It is, in fact, a mistake to think any stock dividends are free money. They're offset elsewhere.

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Re: REIT in taxable for income purposes

Post by abuss368 »

Phineas J. Whoopee wrote: Thu Jan 16, 2020 11:07 pm As abuss368 points out, part of the distributions usually are return of capital. That's no different than if the distributions didn't include it, but you sold shares to get the same amount, ignoring capital gains or losses.

I'm not directly answering your question about taxability, but it would be a mistake to think REIT dividends are free money.

It is, in fact, a mistake to think any stock dividends are free money. They're offset elsewhere.

PJW
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Re: REIT in taxable for income purposes

Post by abuss368 »

SemiRetire wrote: Thu Jan 16, 2020 4:42 pm Was thinking of buying REIT in taxable to get higher dividends payout for spending purposes. (I would like to set aside the total return model for now)
My understanding is that stock dividends are taxed at lower rate than income, say a 15-20 percent dividend tax rate (long term).
I think that bond payments are taxed as income though right?
Long term stock sales are taxed like stock dividends correct?
how about bond sales?

Then I think that REIT payments would be taxed like stock? But that REITS must put out a higher amount like 90 percent of profits or something per year under US REIT law.

Also, as with the recent VWO actually being good in taxable (contrary to opinion here prior), I would assume REIT in taxable is still tax inefficient.

Thanks to anyone who can refresh my understanding of all this. Its been several years since I really was reading on all this, and I am now in early semiretirement, fleshing things out : )
Don’t forget the portion of the “dividend” that is a return of capital lowers your cost basis. If basis is reduced below zero, any additional distribution is treat as a capital gain.
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Re: REIT in taxable for income purposes

Post by venkman »

Have you looked at the High Dividend Yield fund (VHYAX/VYM)?

Yield is around 3.17% and nearly all of it should be qualified dividends.

Tracks closely with the US market and it's much more diversified than a single sector tilt.
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SemiRetire
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Re: REIT in taxable for income purposes

Post by SemiRetire »

Thanks everyone.

Sounds like it’s not a good idea if the payouts are taxed higher than dividends
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Re: REIT in taxable for income purposes

Post by lostdog »

venkman wrote: Thu Jan 16, 2020 11:54 pm Have you looked at the High Dividend Yield fund (VHYAX/VYM)?

Yield is around 3.17% and nearly all of it should be qualified dividends.

Tracks closely with the US market and it's much more diversified than a single sector tilt.
I've seen a few bogleheads go 50% VYM and 50% VYMI. I think this yields around 3.5%.
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Re: REIT in taxable for income purposes

Post by abuss368 »

venkman wrote: Thu Jan 16, 2020 11:54 pm Have you looked at the High Dividend Yield fund (VHYAX/VYM)?

Yield is around 3.17% and nearly all of it should be qualified dividends.

Tracks closely with the US market and it's much more diversified than a single sector tilt.
I started a thread on Vanguard High Dividend Yield a month or so again. The thread did not receive many responses.
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Re: REIT in taxable for income purposes

Post by capjak »

There are individual preferred stocks that have qualified dividends and pay around 5%.

for example AILLL Ameren utility (illiquid so difficult to buy much) but Wells Fargo preferred L can be bought but it is expensive right now but if you do not intend to sell anytime soon than probably neither is going out of business and not likely to be called.
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Re: REIT in taxable for income purposes

Post by abuss368 »

capjak wrote: Fri Jan 17, 2020 5:39 pm There are individual preferred stocks that have qualified dividends and pay around 5%.

for example AILLL Ameren utility (illiquid so difficult to buy much) but Wells Fargo preferred L can be bought but it is expensive right now but if you do not intend to sell anytime soon than probably neither is going out of business and not likely to be called.
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Re: REIT in taxable for income purposes

Post by venkman »

abuss368 wrote: Fri Jan 17, 2020 12:14 pm I started a thread on Vanguard High Dividend Yield a month or so again. The thread did not receive many responses.
I think there's a mild bias here against dividend tilting, since it's not exactly BH-ish, especially in the accumulation phase.

Personally, I think dividend tilting in the withdrawal phase is an underrated strategy. Not that it will outperform a total return portfolio, but if you can get your portfolio to throw off enough to meet your annual spending needs, you never have to worry about selling anything. (Yes, dividend income can go down in a recession, but it's still much more stable than stock prices, and keeping a small cash bucket should be plenty to tide you over.)
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Re: REIT in taxable for income purposes

Post by aristotelian »

All that matters for income purposes is the total return of your portfolio. If you hold REIT in taxable, you will pay more in tax than if they were held in a retirement account. Say you need $10k so you hold enough REIT to produce $10k income. You withdraw $10k from stocks in your brokerage account, then reinvest REIT dividend in stocks in your IRA. You end up with same allocation but pay less in tax.
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Re: REIT in taxable for income purposes

Post by abuss368 »

There is nothing wrong with investing in REITs as part of an income strategy. I would like to possibly combine Vanguard US REIT Index and Vanguard International REIT Index.
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