Tax reform effect on REIT shareholders income

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SGM
Posts: 2653
Joined: Wed Mar 23, 2011 4:46 am

Tax reform effect on REIT shareholders income

Post by SGM » Mon Apr 16, 2018 3:48 am

A recent article in US News and World Report by Rebecca Lake discusses a 20% tax deduction on REIT dividends. She states that someone in the 39.6% bracket would have pass-through entity dividends taxed at 29.6%. She also discusses using REITs for 1031 exchanges which would delay capital gain taxes on real estate sales. The property would have to be titled as a Delaware statutory trust in order to do the 1031 exchange.

Shareholders can deduct that 20 percent of pass-through income from REITs and other pass-through entities, even if they don't itemize deductions on their federal tax return.


https://money.usnews.com/investing/real ... -investors

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

Re: Tax reform effect on REIT shareholders income

Post by grok87 » Mon Apr 16, 2018 5:32 am

SGM wrote:
Mon Apr 16, 2018 3:48 am
A recent article in US News and World Report by Rebecca Lake discusses a 20% tax deduction on REIT dividends. She states that someone in the 39.6% bracket would have pass-through entity dividends taxed at 29.6%. She also discusses using REITs for 1031 exchanges which would delay capital gain taxes on real estate sales. The property would have to be titled as a Delaware statutory trust in order to do the 1031 exchange.

Shareholders can deduct that 20 percent of pass-through income from REITs and other pass-through entities, even if they don't itemize deductions on their federal tax return.


https://money.usnews.com/investing/real ... -investors
Thanks for posting. Does that mean it’s better to hold reits in taxable accounts now rather than ira etc?
Keep calm and Boglehead on. KCBO.

grok87
Posts: 8116
Joined: Tue Feb 27, 2007 9:00 pm

Re: Tax reform effect on REIT shareholders income

Post by grok87 » Mon Apr 16, 2018 7:20 am

Taking a stab at answering my own question.

First of all a slight correction on OP. The top tax bracket is now 37% and the corresponding 29.6% top REIT dividend tax rate is arrived at by applying (1-20%) to THAT number which gives the 29.6% rate the article mentions.

Don’t mean to nit-pick, just trying to understand how all this works.
:)

So one way to think about this is to compare the new REIT tax rates to the qualified dividend tax rate for each income bracket level.

Don’t have time to do this now, but for the top bracket the 29.6% is obviously still higher than the 20% qualified dividend tax rate.

But it is CLOSER. And given the general advantages of holding stocks in taxable- ability to tax loss harvest for example, I think the calculus is not clear. Just looking at top bracket investors it may make sense to hold at least some reits in taxable.

Cheers,
Grok
Keep calm and Boglehead on. KCBO.

SGM
Posts: 2653
Joined: Wed Mar 23, 2011 4:46 am

Re: Tax reform effect on REIT shareholders income

Post by SGM » Mon Apr 16, 2018 2:09 pm

grok87 wrote:
Mon Apr 16, 2018 5:32 am
SGM wrote:
Mon Apr 16, 2018 3:48 am
A recent article in US News and World Report by Rebecca Lake discusses a 20% tax deduction on REIT dividends. She states that someone in the 39.6% bracket would have pass-through entity dividends taxed at 29.6%. She also discusses using REITs for 1031 exchanges which would delay capital gain taxes on real estate sales. The property would have to be titled as a Delaware statutory trust in order to do the 1031 exchange.

Shareholders can deduct that 20 percent of pass-through income from REITs and other pass-through entities, even if they don't itemize deductions on their federal tax return.


https://money.usnews.com/investing/real ... -investors
Thanks for posting. Does that mean it’s better to hold reits in taxable accounts now rather than ira etc?
I don't think it means it is better to hold REITs in a taxable account. However, it is a way to delay capital gains tax thus keeping more money invested until one sells the REITs. Also while owning the REITs you will be getting dividends on a larger balance than if you reinvested the proceeds of a real estate sale minus taxes. The article caught my eye because the state department of transportation wants to take a corner of our farm for a bypass and roundabout likely in 2018. The state parks department wants to buy some additional adjacent land to make up for park land that will be turned in the bypass route. We may also sell our house as we are moving and fixing up another house on an adjacent farm. We also may sell a small apartment building because it is such a hassle. We are keeping the farm land except for the portion the state wants. We don't want to get hit will a lot of capital gains in 2018.

We have used 1031 exchanges when buying this farm land about 15 years ago. I would like to keep all the proceeds in investments rather than pay capital gains taxes now. 15 years ago we were told none of the people involved in the exchange could sell the farm land for 5 years. Researching on the internet it looks like we would have to keep a 1031 exchange in REITs for at least 2 years, but there is no strict rule on this. According to the article we would have to use this Delaware statutory trust. The maximum taxation on trusts is 37% same as individuals.

I just quoted the 39.6% from the recent US News and World Report article. Thanks for the correction Grok.

grok87
Posts: 8116
Joined: Tue Feb 27, 2007 9:00 pm

Re: Tax reform effect on REIT shareholders income

Post by grok87 » Mon Apr 16, 2018 7:03 pm

SGM wrote:
Mon Apr 16, 2018 2:09 pm
grok87 wrote:
Mon Apr 16, 2018 5:32 am
SGM wrote:
Mon Apr 16, 2018 3:48 am
A recent article in US News and World Report by Rebecca Lake discusses a 20% tax deduction on REIT dividends. She states that someone in the 39.6% bracket would have pass-through entity dividends taxed at 29.6%. She also discusses using REITs for 1031 exchanges which would delay capital gain taxes on real estate sales. The property would have to be titled as a Delaware statutory trust in order to do the 1031 exchange.

Shareholders can deduct that 20 percent of pass-through income from REITs and other pass-through entities, even if they don't itemize deductions on their federal tax return.


https://money.usnews.com/investing/real ... -investors
Thanks for posting. Does that mean it’s better to hold reits in taxable accounts now rather than ira etc?
I don't think it means it is better to hold REITs in a taxable account. However, it is a way to delay capital gains tax thus keeping more money invested until one sells the REITs. Also while owning the REITs you will be getting dividends on a larger balance than if you reinvested the proceeds of a real estate sale minus taxes. The article caught my eye because the state department of transportation wants to take a corner of our farm for a bypass and roundabout likely in 2018. The state parks department wants to buy some additional adjacent land to make up for park land that will be turned in the bypass route. We may also sell our house as we are moving and fixing up another house on an adjacent farm. We also may sell a small apartment building because it is such a hassle. We are keeping the farm land except for the portion the state wants. We don't want to get hit will a lot of capital gains in 2018.

We have used 1031 exchanges when buying this farm land about 15 years ago. I would like to keep all the proceeds in investments rather than pay capital gains taxes now. 15 years ago we were told none of the people involved in the exchange could sell the farm land for 5 years. Researching on the internet it looks like we would have to keep a 1031 exchange in REITs for at least 2 years, but there is no strict rule on this. According to the article we would have to use this Delaware statutory trust. The maximum taxation on trusts is 37% same as individuals.

I just quoted the 39.6% from the recent US News and World Report article. Thanks for the correction Grok.
That's interesting.
Can it be a reit fund or does it have to be individual reits. Also as you may know the vanguard real estate index fund is transitioning away from 100% pure reits to include some real estate operating companies, i think it will now be like 96% reits.
Keep calm and Boglehead on. KCBO.

SGM
Posts: 2653
Joined: Wed Mar 23, 2011 4:46 am

Re: Tax reform effect on REIT shareholders income

Post by SGM » Mon Apr 16, 2018 7:47 pm

I believe it can be individual REITs that you would buy in the 1031 exchange not necessarily a REIT fund. For instance one could buy American Tower who own cell towers. The Delaware statutory trusts may be a stumbling block for us. Possibly we won't have as much in capital gains as I first thought.

It is not clear to me how they come up with the actual amount of taxation with this 20% deduction.

Those in lower brackets might benefit from holding pass through funds or companies without doing the 1031. I leave it for the mathematicians to figure at what point owning a REIT or other type of pass through is better off held in a taxable account vs. a tax deferred account given the 20% deduction.

grok87
Posts: 8116
Joined: Tue Feb 27, 2007 9:00 pm

Re: Tax reform effect on REIT shareholders income

Post by grok87 » Mon Apr 16, 2018 7:53 pm

SGM wrote:
Mon Apr 16, 2018 7:47 pm
I believe it can be individual REITs that you would buy in the 1031 exchange not necessarily a REIT fund. For instance one could buy American Tower who own cell towers. The Delaware statutory trusts may be a stumbling block for us. Possibly we won't have as much in capital gains as I first thought.

It is not clear to me how they come up with the actual amount of taxation with this 20% deduction.

Those in lower brackets might benefit from holding pass through funds or companies without doing the 1031. I leave it for the mathematicians to figure at what point owning a REIT or other type of pass through is better off held in a taxable account vs. a tax deferred account given the 20% deduction.
I am not a tax expert. But the way i read the article your tax rate on the reits dividend income is now 80% i.e. (1-20%) of your oridnary income tax rate. So if one is in the 37% bracket then it is 80%*37% or 29.6%. If you are in the 32% bracket it is 80%*32%= 25.6% and so on.
Keep calm and Boglehead on. KCBO.

SGM
Posts: 2653
Joined: Wed Mar 23, 2011 4:46 am

Re: Tax reform effect on REIT shareholders income

Post by SGM » Tue Apr 17, 2018 4:10 pm

Thanks Grok. That makes sense. The original article states 39.6% to 29.6% with a 20% deduction which did not make sense. The author neglected to put in the new top rate of 37 % to calculate a 29.6% for the tax rate on pass through dividends with the 20% deduction.

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