Investing to Get Your Share Of A 1.455 Trillion Dollar Tax Pie

Investing in real estate without becoming a landlord might be a new idea to you.  On the other hand, you might be one of the 80 million Americans who had the foresight to be investing in a Real Estate Investment Trust.  According to Accounting Today magazine, “American citizens and corporations are projected to enjoy a net tax benefit of approximately $1.455 trillion over the next 10 years from the new tax law…”

However, as the experts are quick to point out, these dollars are not going to be just neatly cut into taxpayer-sized pieces and evenly distributed.  As you shall soon see, “Real Estate Investment Trusts (REITs) and their investors are the incontestable winners.” Let’s explore the some of the reasons.

Investing in REITs: Why It Might be a Smart Move

As we explained in our previous blog, REITs are professional firms.  These firms purchase income-generating properties with the capital they raise from shareholders.  You might want to read our previous article.  It will enhance your understanding of this, part II of our online coverage.   What’s so attractive about investing in a REIT?

1. With REITs, You’re Investing in The No-Real-Estate-License-Required Plan- for Real Estate Investment Fun

Investing in a REIT Might be right for you

In the first place, at Gavrilov & Co, we have noticed that you can invest in real estate this way.  And you don’t have to have an enormous amount of knowledge about the real estate market since you are essentially a shareholder.  And you won’t have to invest as much money as those who invest in properties directly.  Quite simply, buy your shares and enjoy your dividends.

2. You Might Be Investing in a Pass-Through Plan

Most REITs are structured as pass-through entities.  The purpose is to avoid the double taxation of income, as the REIT trust will “pass through at least 90 percent of the profit and losses to their investors.” Investors (shareholders) get a distribution from REITs in one of two ways:

…As regular income with a 1099-DIV form…

…Or take your dividend as a Return of Capital.

The beauty of the latter is that it acts as a tax deferral to investors.

Why?  It’s like investing in a tax deferral because the return of capital is not taxed.  It’s not taxed until the company sells the properties with a profit.  Now, readers, you must be beginning to smile if you are thinking of investing in a REIT

Feel Like You Own a Hospital, a Hotel and Apartment When You See Dividends from Your REIT

Likewise, do you realize that the 25 percent tax rate on the capital gains also could be “lower than the income tax rate which tops out at 37 percent under the old tax code?”  (You should be full-on smiling now.  And you realize you could have some fun with this type of real estate investing.  And you could do some fine tax planning strategies at the same time.)

In our previous blog, we introduced the concept of the Real Estate Investment Trust.  Now we present for you the benefits of this type of investing.  Keep in mind REITs might not be right for you.
But be aware of how elegantly the new tax laws fit in with this type of investing.

Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act now grants investors a 20 percent tax reduction on the pass-through income received.  To be clear, let’s say Alex Smythe is an individual REIT investor.  At tax time, he files jointly with his wife and they have a taxable income of a little less than $315,000.  At Gavrilov & Co, we think they just might appreciate a 20 percent deduction on the REIT dividends.  The new tax laws grant this because the dividends are qualified business income.

Likewise, some REIT investors with higher taxable income, up to $415,000 jointly or $207,000 individually, will possibly enjoy a tax deduction at a reduced scale.  There’s no doubt about it.  REIT investors are at the high end of the income tax bracket have a lot to gain from the tax deductions in the new laws.

Gavrilov & Co clearly foresees the new tax laws benefiting REITs investors and their shareholders as 2018 progresses.  Likewise, we predict you will see many more taxpayers investing in REITs now that big news of their benefits is becoming better known.

Summary of Our Favorite Benefits of REITs

With the help of research from Accounting Today, we have found several attractive benefits for investing in REITs.

Investing in a REIT is a Time-Honored Way of Gaining Residual Income Through Dividends.

Looking Good in the Long Run: REITs have a Competitive Long-Term Performance.  Basically, REITs provide long-term total returns in a similar manner to other stocks.
Liquidity: Shares of publicly listed REITs are readily traded on the major stock exchanges.
Nice in a Zig Zag Situation: (Portfolio Diversification)

We have heard it said that when the market zigs, the REIT will zag.  This means REITs do not follow the same pathways as stocks and bonds that go up and down more vigorously and in unison.  REITs just don’t play follow-the-leader.  Thus, since REITs do not correlate with other stocks and bonds, they are a great choice for investors who wish to diversify their portfolio.
Reliable Dividends:  The reputation for substantial, stable dividends for shareholders did not just begin this year for REITs.  They have kept a clean record of basically steady income for shareholders, despite the condition of the markets.

What Walls Hold Your Investment Dreams?

Have you always wished you could own a piece of a big office building or a luxury hotel or a family apartment complex?

Would you feel wonderful walking the halls of a fine clinic, knowing your money was part of the reason for its excellent reputation?  Is your fantasy investment wrapped up in retail where you own a part of your favorite store?  Perhaps you want to taste all of these REIT opportunities.

Some REITs have diverse properties.  But typically, they focus on one special type from the above list of properties in their portfolios.  So, perhaps you are not sentimental about the kind of property you are investing in.  Perhaps you just want to know what will make you the most money.  Statistics prove that right now, the best-individualized REITs are, believe it or not, retail store REITs.

This is because of the tax breaks and the new tax codes.  You see, retail pays the highest effective corporate tax rate of any industry, thus lowering the “corporate tax rate benefits retail more than other industries.”

So, investing in a Real Estate Investment Trust might or might not be right for you.  (Or should we say “REIT for you?)  However, if you are intrigued by the world of real estate and considering a REIT, we hope you will talk to us at Gavrilov &Co. while you are doing your tax planning.  We can help.

 By Rudy Gavrilov

 

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Rudy Gavrilov is the Managing Partner of Gavrilov & Co LLP a certified public accounting firm located in NYC & Queens. Who believes that his clients deserve Better Numbers. Better Business. Better Life.