REITs

[AreWeThereYet0]

I recently read that REITs are highly tax inefficient and should not be held in non tax advantaged accounts. Of course my very small holding is sitting in a regular brokerage account that I was contributing to every other week. That said what is my best move? I have a Roth IRA but I already maxed it out and I don't think I could move the money over directly anyway. So do I sell and slowly rebuy in my Roth and face the short term capital gains taxes? I already flat stopped contributing. Thanks.

 

[38Chevy454]

Tax inefficient because they are required to distribute profits each year. So you will have income every year. I would just sell and invest into whatever goes with your desired allocation. So if you have viewed the REIT as an income type similar to bonds, just buy bond fund or individual bonds. Bonds still not the best for tax efficiency. If you want it as most tax efficient, then equities would be better. If you want some income, buy some with qualified dividends which are taxed lower rates. If longer term, buy more growth oriented with little or no dividend yield. Only tax issue will be when you sell the equities later, as long term cap gains; which are also taxed at lower rates.

 

[RunningBum]

You are correct that you can't move it directly. I would sell in the taxable account and buy back in the Roth. Since it's just a small amount it's up to you whether you take a STCG, or hold for a year and then sell from your taxable. Neither should hurt too bad. IIRC, REITs can also make you tax filing more complicated. If it were me, I'd verify that, and if true, I'd sell it this year so that I only had to deal with the taxes in 2020.


When making such moves, make sure you have no losses on the holding in the taxable account if you're buying the same in the Roth within 30 days. The loss will be a wash sale, and you won't be able to recover it later since the new shares are in the ROth.

 

[BrianB]

A dissenting opinion here. The 2017 TCJA (tax cut & job act) allows REIT shareholders to deduct 20% of their REIT dividends, even if you take the standard deduction. This is from T Rowe Price:

2019 Qualified REIT Dividends
Beginning in 2018 (until the end of 2025), if you are a taxpayer other than a corporation, you are generally allowed a deduction of up to 20% of your qualified real estate investment trust (REIT) dividends. Qualified REIT dividends from a mutual fund are reported in Box 5 of your Form 1099‑DIV.

If the holding is in an investment account you're going to get a 20% tax savings. I use Turbotax and download tax info from Fidelity. The deduction was automatically calculated and included in my filing.

If the holding is in a Traditional IRA the savings are lost because 100% of distributions from a Trad. IRA are taxed at regular income levels.

If the holding is in a Roth IRA it's a moot point since all earnings and qualified distributions from a Roth are tax-free.

This deduction is phased out for higher income individuals and couples.

While it's not as great a savings as the 0% tax on qualified dividends that many moderate income earners can get, it does make REITs more desirable (less undesirable?) in after-tax investment accounts.

Brian

 

[pb4uski]

That's interesting... I wonder if I could buy a REIT long in my taxable account and get the dividend and tax benefit and then sell the same REIT short in my tax-deferred account.

I receive $100 of dividends but only get taxed on $80 but in the tax-deferred account I pay out $100 of dividends so that is $100 less of ordinary income that I'll eventually have.... don't I come out ahead by the tax benefit of the 20% deduction?

 

[BrianB]

I wonder if I could buy a REIT long in my taxable account and get the dividend and tax benefit and then sell the same REIT short in my tax-deferred account.

There are some minimum holding time requirements. I think it's 46 days within the time frame of 45 days before to 45 days after the ex-dividend date. That might make the long / short strategy difficult to manage. YMMV.

Here is the TRP article:

https://www.troweprice.com/personal-investing/planning-and-research/tax-planning/prepare-your-taxes/fund-specific-tax-and-reclassification-info/qualified-reit-dividends.html

Brian

 

[pb4uski]

Just read that you can't short stock in an IRA so what I was thinking of wouldn't work.

 

[RunningBum]

I missed that change, Brian. Seems like this could change the strategy for many. Thanks for pointing this out.

 

[Montecfo]

I would prefer to hold REITs in a taxable account because of the 20% business deduction.