A recent announcement by the IRS on January 18, 2019 gives U.S. investors one more reason to own REIT funds: lower taxes on income.
Effective for the 2018 tax year, income distributions from REITs held in mutual funds will be eligible for a new 20% pass-through deduction called Qualified Business Income (QBI). Instead of being taxed at top tax rate of 37%, the tax on REIT ordinary distributions will now top out at 29.6%.
The QBI deduction is available regardless of an individual’s level of income or whether they itemize or take the standard deduction, and will be provided to shareholders on their year-end Form 1099.
Ordinary income historically represents about 60% of REIT distributions, with the rest generally categorized as a mix of capital gains (taxed at a maximum of 20%) and return of capital (tax-deferred until fund shares are sold). The Medicare surcharge for higher earners on net investment income remains 3.8%.
The new deduction improves on an already tax-efficient vehicle. REITs are pass-through entities, which means REIT income is taxed only once, at the shareholder level. Because REITs generally don’t pay corporate taxes, they have more income to distribute. This is a large part of why REITs have historically paid higher dividends than the S&P 500 average.
Furthermore, our real estate securities strategies offer investors the potential for:
- Participation in continued strong U.S. real estate fundamentals
- Diversification across multiple property sectors
- Competitive total returns
- Active management by one of the world’s largest dedicated real estate securities teams
If you have additional questions about the tax reform's potential impact on your investments, please contact your legal, tax or investment professional. Learn more about real estate by accessing our latest insights or by reviewing our available strategies.
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Risks of Investing in Real Estate Securities
Risks of investing in real estate securities are similar to those associated with direct investments in real estate, including falling property values due to increasing vacancies or declining rents resulting from economic, legal, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors such as interest rate changes and market recessions. Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties, and differences in accounting standards. Some international securities may represent small- and medium-sized companies, which may be more susceptible to price volatility and less liquidity than larger companies.
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