REITs under new tax law

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Nearly A Moose
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REITs under new tax law

Post by Nearly A Moose » Thu Jan 04, 2018 10:14 pm

[Post merged into here, see below. --admin LadyGeek]

Pardon if this has been addressed already, but the tax law threads have gotten a bit long. Is the new tax law expected to affect REITs in a significant way? For example, are they going to be taxed differently (either to the company owning the properties or the individuals owning the fund shares)? And is the conventional wisdom that they should still be held in a Roth if possible?
Pardon typos, I'm probably using my fat thumbs on a tiny phone.

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abuss368
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REITs In Taxable - New Tax Law

Post by abuss368 » Thu Jan 04, 2018 11:06 pm

With the details of the new tax law starting to emerge and specifically the new Qualified Business Income deduction, there may be a case for REITs in taxable. The new law definitely warrants a look. I have read a few articles where it appears the strategies may be changing. I have noted a couple of posts stating the same so I wanted to start a new thread to generate thoughts and perspective.

Thoughts? Has anyone read any good articles?
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RNJ
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Re: REITs In Taxable - New Tax Law

Post by RNJ » Fri Jan 05, 2018 8:02 am

From Seeking Alpha:

https://seekingalpha.com/article/413319 ... tax-reform

"The last time an omnibus tax reform passed into law, it was not a good day for the REIT sector. The Tax Reform Act of 1986 did many things to simplify the tax code, but it also placed strict limitations on loss deductions from passive investment activity, in addition to other restrictions that took away some of the tax perks of investing in REITs.

Thankfully for the REIT investors of today, history has not repeated itself. Rather, the Tax Cuts and Jobs Act, which was finally approved by Congress on December 20th, looks set to benefit REITs of all stripes . . ."

Stormbringer
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Re: REITs In Taxable - New Tax Law

Post by Stormbringer » Fri Jan 05, 2018 8:55 am

I thought the pass-through provisions have a sunset to them (i.e. not permanent). If so, there is a risk that you'll enjoy preferential tax treatment for a while and then things will snap right back to where they were in 2017.
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RNJ
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Re: REITs In Taxable - New Tax Law

Post by RNJ » Fri Jan 05, 2018 9:14 am

Stormbringer wrote:
Fri Jan 05, 2018 8:55 am
I thought the pass-through provisions have a sunset to them (i.e. not permanent). If so, there is a risk that you'll enjoy preferential tax treatment for a while and then things will snap right back to where they were in 2017.
Yes. And it's not clear that the pass-through provisions will pass through (see what I did there? :wink: ) in any meaningful way to purchasers of REITS.

Interestingly, the market seems to have said "meh", as VG's REIT index (U.S.) is actually trading lower since the bill was signed into law.

Also - to the OP's point, there's no clear green light as to whether it makes sense to hold REITs in taxable accounts. In fact, with the pass-through provision sunsetting, you could find yourself worse off in having to sell REITs at a taxable gain.

livesoft
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Re: REITs In Taxable - New Tax Law

Post by livesoft » Fri Jan 05, 2018 9:16 am

At least you can tax-loss harvest your REIT shares held in a taxable account. :twisted:
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deltaneutral83
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Re: REITs In Taxable - New Tax Law

Post by deltaneutral83 » Fri Jan 05, 2018 9:54 am

I haven't been keeping up, by why have REITs been getting their teeth kicked in the last month?

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Re: REITs In Taxable - New Tax Law

Post by abuss368 » Fri Jan 05, 2018 11:28 am

deltaneutral83 wrote:
Fri Jan 05, 2018 9:54 am
I haven't been keeping up, by why have REITs been getting their teeth kicked in the last month?
Interest rate sensitivity.
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telemark
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Re: REITs In Taxable - New Tax Law

Post by telemark » Fri Jan 05, 2018 12:31 pm

The case against putting REITs in taxable is that they issue a lot of non-qualified dividends. Does anything in the new law affect that?

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Re: REITs In Taxable - New Tax Law

Post by jhfenton » Fri Jan 05, 2018 2:06 pm

telemark wrote:
Fri Jan 05, 2018 12:31 pm
The case against putting REITs in taxable is that they issue a lot of non-qualified dividends. Does anything in the new law affect that?
The initial reading is that you get to exclude 20% of the REIT dividends from taxation. I haven't had time to research it myself.

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telemark
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Re: REITs In Taxable - New Tax Law

Post by telemark » Fri Jan 05, 2018 3:18 pm

jhfenton wrote:
Fri Jan 05, 2018 2:06 pm
telemark wrote:
Fri Jan 05, 2018 12:31 pm
The case against putting REITs in taxable is that they issue a lot of non-qualified dividends. Does anything in the new law affect that?
The initial reading is that you get to exclude 20% of the REIT dividends from taxation. I haven't had time to research it myself.
Thanks. But 80% of too much is, um, probably still too much? Unless you have a compelling reason to own REITs in taxable, and then you are probably doing it already.

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abuss368
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Re: REITs In Taxable - New Tax Law

Post by abuss368 » Fri Jan 05, 2018 3:36 pm

telemark wrote:
Fri Jan 05, 2018 12:31 pm
The case against putting REITs in taxable is that they issue a lot of non-qualified dividends. Does anything in the new law affect that?
Hi telemark -

Historically that has been the case: the dividends from REITs included a high percentage on non-qualified dividends. This income was taxed at an Individual's nominal tax rate and not the lower qualified rate of 15% (or 20%).

However, with the Tax Reform Law, there is a new Qualified Business Income deduction that reduces income by 20%. I am curious of the impact on REITs dividends to individual taxpayers.
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Re: REITs In Taxable - New Tax Law

Post by abuss368 » Fri Jan 05, 2018 3:37 pm

livesoft wrote:
Fri Jan 05, 2018 9:16 am
At least you can tax-loss harvest your REIT shares held in a taxable account. :twisted:
That is true indeed. Do you have REITs (or have you) in taxable accounts?
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Re: REITs In Taxable - New Tax Law

Post by livesoft » Fri Jan 05, 2018 3:42 pm

I own shares of VNQ every now and then, but I do not own any shares at the present time and I would not own VNQ shares in taxable because I don't expect them to go down in price during the brief time that I own those shares.
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Re: REITs under new tax law

Post by LadyGeek » Fri Jan 05, 2018 3:58 pm

I merged Nearly A Moose's question into here, which is a similar discussion. This thread is in the Investing - Theory, News & General forum (investing).

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Re: REITs In Taxable - New Tax Law

Post by walletless » Fri Jan 05, 2018 4:52 pm

abuss368 wrote:
Fri Jan 05, 2018 3:37 pm
livesoft wrote:
Fri Jan 05, 2018 9:16 am
At least you can tax-loss harvest your REIT shares held in a taxable account. :twisted:
That is true indeed. Do you have REITs (or have you) in taxable accounts?
I don't own REIT in taxable... but I am curious what would be a good TLH pair for VGSLX/VNQ?

NYCwriter
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Re: REITs under new tax law

Post by NYCwriter » Thu Jan 11, 2018 2:39 am

Looks like Vanguard's REIT has touched its 52-wk low.

A little grumpy since I'm holding it in tax-advantaged. I don't like making reactive decisions so I didn't close it when it dropped. Maybe the risk-reward has gone down, but new lows are always possible.

Pharm91
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Re: REITs under new tax law

Post by Pharm91 » Thu Jan 11, 2018 9:56 am

The run on REITS seems to be a perfect storm at the moment. Investor optimism was not very high during this past year except for in data centers. You would have thought the rate hikes would be priced into the market prior to this recent decline. I can see us digging down to 25.50 on vgsix or even further before investors realize this is an overcorrection. I wasn't planning on doing a backdoor roth for 2018 but I will be watching closely today. Another 1% or greater fall and I'll be buying. If you're in tax advantaged with a >5 year horizon its a must hold and possibly a buy at current prices.

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Re: REITs under new tax law

Post by NYCwriter » Thu Jan 11, 2018 1:19 pm

I went ahead and added more to VG REIT.

My original core portfolio was based on Swenson's lazy portfolio, except that I'm in intermediates and no TIPS. I still have some individual large cap tech and financials years old (before I got wise to simple portfolios) that I need to keep reducing these. REITs are now less than 10% because of the run up in equities (index funds are in taxable) but the combined taxable/Roth portfolio has worked well enough for me over time that I'm okay with holding and adding to REIT as an alternative equity class.

With the run up I've been rebalancing and putting extra cash into a new VFSTX Short Term investment grade as a temporary holding.

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Re: REITs under new tax law

Post by SlowMovingInvestor » Thu Jan 11, 2018 1:41 pm

Sorry to be dense but as I understand the thread, the new tax law does provide some (tangential) benefits to REITs because of the pass through changes But REITS have still taken a beating (that I can see !)

Is that correct ?

One of the problems with the REIT index is that I think shopping and mall REITs might take even bigger hits going forward because of the move to online, and that wipes out any gain in data center REITs.

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Re: REITs under new tax law

Post by NYCwriter » Thu Jan 11, 2018 2:07 pm

There have probably been more than 6,000 retail store closings (5300 as of mid-2017 when I last checked) but the big mall "anchor" store closings are what hurts. Simon is a core holding and it's been heavily affected. However, mall groups have redeveloped into other areas. There are more gyms, more development around the loss of mall anchors.

I do think the shift to online is going to force creativity in the interests of survival. It's the use value of space that needs to be reconsidered. The residential space is doing well, and there's a high demand for affordable living space.

I can see trying to pick winners from the basket, but that defeats the reason to hold the index. If I don't think it's a value add in my portfolio I'd rather just close it.

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Re: REITs under new tax law

Post by Pharm91 » Fri Jan 12, 2018 10:30 pm

SlowMovingInvestor wrote:
Thu Jan 11, 2018 1:41 pm
Sorry to be dense but as I understand the thread, the new tax law does provide some (tangential) benefits to REITs because of the pass through changes But REITS have still taken a beating (that I can see !)

Is that correct ?

One of the problems with the REIT index is that I think shopping and mall REITs might take even bigger hits going forward because of the move to online, and that wipes out any gain in data center REITs.
That is correct. They've been taking a beating because interest rates are set to rise and they rely so heavily on debt. In fact, yield has risen recently moving inversely with reits.

With regard to long term outlook for the index begin held down by simon, remember they own prime real estate. Once the assets exceed earnings power value I assume they'll try to re-develop the property. I personally would weight the portfolio with funds like HCN, DLR, OHI and a few others.

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