By Gary Meeks, RICP®
REITs have historically provided investors dividend-based income at competitive rates and potential tax benefits.
What is a REIT or Real Estate Investment Trust? Wikipedia has a good definition: A real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, including office and apartment buildings, warehouses, hospitals, shopping centers, hotels, and commercial forests. Some REITs engage in real estate financing and hold real estate mortgages (Mortgage REIT).
REITs may provide tax advantages as well. The 2017 Tax Cuts and Jobs Act allow the pass-through deduction for REIT investors. This means REIT investors can deduct up to 20% of their dividends.
REITs, like many companies, distribute earnings to investors in the form of dividends. Unlike many companies, however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes, so their investors are only taxed once. This is a major reason income investors value REITs over many other dividend-paying companies.
The tax code requires REITs to adhere to certain standards to qualify their shareholders for the tax advantages mentioned above. One of those such standards is the 90% rule, which requires REITs to pay out at least 90% of its earnings as dividends.
Some common REIT alternatives are traded REITs, non-traded REITs, and REIT exchange traded funds (ETFs) and mutual funds.
A REIT stock is a company that owns real estate properties or finances them. They trade on the stock exchange just like other stocks. You should do your research before buying a REIT stock.
The benefits of a REIT ETF (exchange traded fund) are that they are diversified and professionally managed like a mutual fund but have greater liquidity than a mutual fund. They trade like stocks, usually instantly, whereas mutual fund purchases or liquidations get that trading day’s closing price. The ETF also typically has a more efficient tax structure and lower operating expenses than most mutual funds.
A non-traded REIT does not trade on an exchange but is still required to file with the SEC and are therefore regulated. Because they do not trade on an exchange, they are less liquid than some of the other REIT options and redemption opportunities may be limited.
Many Broker Dealers provide access to non-traded REITS and can help you find the right program for your needs. Most broker dealers require investors meet minimum financial standards to purchase a non-traded REIT. REITS are considered an alternative investment to stocks and bonds and therefore provide diversification, which can potentially lower the risk to your overall investment portfolio.