The new U.S. tax law legislation could be a boon for real estate investment trusts and REITs-related exchange traded funds as they will foot a smaller tax bill on dividends under the new plan.
The new tax plan comes with a deduction for pass-through businesses or income derived from commercial activities that their owners or shareholders pay on persona income taxes, reports Esther Fung for the Wall Street Journal.
This deduction for pass-through businesses also covers the income that flows to REIT investors through dividends as rent or mortgage payments are translated into shareholder dividend payouts.
The new plan allows investors to deduct 20% of income with the remainder of the income taxed at the investor’s marginal rate, and it is available even if one does not itemize the deductions. Consequently, REITs investors who use to pay the top income-tax rate of 39.6% on dividends received will now see that rate dip to 29.6%, according to NAREIT, the National Association of Real Estate Investment Trusts.
“Clearly this is a deduction that will lower the overall tax rate for individuals who invest in REITs,” Dianne Umberger, the REIT leader for Ernst & Young’s National Tax Department, told the WSJ.
The new tax rate would make REITs a more attractive investment option for income-minded investors, adding to demand for REIT-related investments. Investors who earn rental income outside of REITs would fall under the top tax rate of 37% under the new bill but they would see their tax hit lowered to 29.6% through a REITs position.
This new tax legislation does not affect the capital gains on REITs, which remains at 20%.
“There has never been a lower rate of tax for rent and mortgage interest received through REITs,” David Miller, a partner in the tax department of Proskauer Rose LLP, told the WSJ. “This is unprecedented.”
Investors interested in gaining broad exposure to the dividend-paying REITs can look at ETF options like the Vanguard REIT ETF (NYSEArca: VNQ), iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) and Schwab US REIT ETF (NYSEArca: SCHH), among others. VNQ has a 4.67% 12-month yield, IYR shows a 3.93% 12-month yield and SCHH comes with a 2.60% 12-month yield.
For more information on real estate investment trusts, visit our REITs category.