Many investors ask if REITs are taxed differently than other asset classes and the answer is a resounding “yes”. A REIT in a taxable account has numerous useful tax benefits that simply aren’t available to many other asset classes when you pay taxes. Here’s a look at just a few:
The Pass-Through Deduction
Thanks to the 2017 Tax Cuts and Jobs Act, sweeping new changes to the tax code allow for a lucrative tax benefit for REIT investors: the pass-through deduction.
The pass-through deduction allows REIT investors to deduct up to 20% of their dividends. Investors in the top tax bracket can potentially see their tax bill for dividends go from 37% to 29.6%. That means that you’re saving up to $740 annually on $10,000 of REIT dividends. Here’s the simple math:
Avoiding Double Taxation
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.
For example: Compare a REIT, a non-REIT corporation that distributes 90% of income to investors in the form of dividends and 10% reinvested, and a non-REIT corporation that distributes 50% of income to investors and 50% reinvested. Assume the Net Taxable Income is $1 million for all three at a 21% federal corporate tax rate.
How do REITs pay dividends? REITs are required to distribute at least 90% of income to investors through dividends and any portion of income distributed to investors is not taxable at the fund level, meaning just $21,000 is paid in federal corporate taxes compared. The dividend income non-REIT corporations pay is subject to corporate income taxes, which means less funds available to distribute to investors.
Depreciation
Another gift the tax code has bestowed upon real estate investors is the concept of depreciation. As it relates to REITs, depreciation basically serves as a tax deferral mechanism. The greater the amount of depreciation expense, the more likely it is that the taxable portion of the REIT dividends will decrease.
Depreciation works to effectively reclassify certain dividends from “ordinary income” to “return of capital.”Minimizing “ordinary income” dividends means minimizing the amount of dividend income that is taxed at the personal rate, while maximizing the amount of income that is taxed at a 25% rate.
The 90% Rule
Historically, REITs have been given special tax treatment as a carrot to everyday investors seeking access to a diversified portfolio of real estate without the large capital investment required to actually acquire such a portfolio. In return, the tax code holds REITs to certain standards. One such standard is the 90% rule, which requires REITs to pay out at least 90% of its earnings as dividends.
The 90% rule was created to encourage REITs to fulfill the original goal of allowing everyday investors to enjoy passive income from a diversified portfolio of real estate.The 90% rule is a check on executive management which may seek to reinvest earnings rather than distributing them directly to shareholders.
Consult a Tax Advisor
The U.S. government has used the tax code to encourage investors to participate in real estate gains since the creation of real estate investment trusts in 1960. As was the case in the 2017 Tax Cuts and Jobs Act, more tax benefits continue to emerge for REIT investors with each new draft of the tax code. So the next time you’re with your tax advisor, ask how investing in a REIT can get you the income you want and the tax breaks you deserve using examples of REIT like Streitwise. You may even see more tax benefits with REITs than general real estate holding company tax benefits.
Streitwise Taxes
Unless your investment is held in a qualified tax-exempt account, your dividends will generally have REIT tax implications. Dividends will typically come in three forms – (i) return of capital dividends (which are generally not taxed and instead reduce your tax basis for future capital gain consideration), (ii) capital gain dividends (which are generally taxable at long-term capital gain rates), or (iii) dividends from current or accumulated earnings or profits (which are generally taxed at ordinary income rates). However, because each investor’s tax considerations are different, we recommend that you consult with your tax advisor.
What type of tax returns will I get – 1099 or K1?
Investors will receive a Form 1099-DIV, if required, by January 31 of the year following each taxable year if they received qualified REIT dividends.
Are taxes calculated as capital gains or taxable REIT dividend income?
Regular income, although you benefit from the tax advantages of REITs as explained above.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors.
Alex Wills
Mr. Wills is the Marketing Director and Head of Product for Streitwise.
Prior to joining Streitwise, Mr. Wills was Head of Paid Media at Bitcoin IRA and Fortress Gold Group. Previously, Mr. Wills was the Director of Lead Generation at GTMA, a real estate marketing agency, where he founded the paid media department that oversaw a large nationwide portfolio of multifamily properties. Mr. Wills holds a Bachelor of Science degree in Marketing from the University of Florida.
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SW Manager, LLC (“Manager”) is a wholly-owned subsidiary of and controlled by Tryperion Holdings, LLC (our “Sponsor”). Manager is the external manager and advisor of 1st Streit Office Inc. (“1st Streit Office”) and 1st Streit Office Operating Partnership LP (our “Operating Partnership” and, together with 1st Streit Office, “Our Current Offering”). 1st Streit Office is the sole general partner of our Operating Partnership, through which all of our assets will be owned and substantially all of our operations will be conducted. All references herein to “Streitwise” refer, as applicable, to Manager, 1st Streit Office, the Operating Partnership, or any of their affiliates (collectively, the “Streitwise Entities”). Unless explicitly stated to the contrary, all references to “we,” “us,” and/or “our” shall refer to the Streitwise Entities. By using Streitwise, you accept our Terms of Service and Privacy Policy.
An offering statement regarding this offering has been filed with the SEC. This offering is structured as a non-traded real estate investment trust, or “REIT,” under Regulation A+ of the JOBS Act. The SEC has qualified that offering statement which only means that Streitwise may make sales of the securities described by that offering statement. It does not mean that the SEC has approved, passed upon the merits or passed upon the accuracy or completeness of the information in the offering statement. You should read the Offering Circular before making any investment which is available here: streitwise.com/oc
You may have been referred to Streitwise by a third-party (“Solicitor”). Compensation to any Solicitor may be up to $200 per email registration. A Solicitor may promote and/or may advertise Streitwise’s investment services and may offer independent analysis and reviews of Streitwise’s services. Streitwise and any Solicitor are not under common ownership or otherwise related entities. We cannot ensure the accuracy of the data provided from any Solicitor.
Performance: Past performance is not a guarantee of future results. All historical returns, target returns, or hypothetical projections may not reflect actual future performance.
Risk: This investment involves a certain level of risk and may result in partial or total loss. We cannot guarantee that we will reach our target return for our investors.
Tax: Prospective investors should confer with their tax advisors regarding the tax consequences based on their particular circ*mstances. Neither Streitwise nor any Solicitor assumes responsibility for the tax consequences for any investor.
Liquidity: Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term should not invest. See Stockholder Redemption Plan in the OC.
1 Dividends & returns: Current annualized dividend based on the most recent dividend declaration as of the quarter ending 3/31/2024. Dividend return calculations based on NAV at the time of dividend return. 1Q24 dividend payout of $0.11/share equates to a 6.2% dividend based on the current NAV. The REIT has averaged a 7.2% annualized return since 2020 and a 8.3% annualized return since 2017 based on the average NAV for the respective periods. See Quarterly Report for all returns history.
2 Source: FTSE NAREIT All Equity REITs vs S&P 500.
3 Sponsor Performance: Related to investments by Sponsor, Tryperion Holdings, as part of one of its prior programs, and not of any of the Streitwise Entities. Reflects gross IRR on realized investments in the Sponsor’s investment portfolio since inception. Sponsor performance data as of 4Q23.
4 Target returns: We will seek to invest in real properties and other real estate-related assets that we believe can produce a strong return through a combination of cash flow and appreciation. We cannot guarantee that we will reach this target return for our investors.
This page may contain forward-looking statements. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates”. Such forward-looking statements are subject to various risks and uncertainties, including those described under the section entitled “Risk Factors” in the Offering Circular. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in the Company’s filings with the SEC. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
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