Real estate investment trusts (REITs) are publicly traded companies that own, operate, or finance income-producing properties such as apartment buildings, office spaces, and shopping centers. These entities are structured in a way that allows investors to invest in commercial real estate while receiving tax benefits. Historically, REITs have delivered competitive total returns based on high, steady dividend income and long-term capital appreciation. REITs are required to distribute at least 90% of their taxable income to shareholders, which makes them an attractive option for income-seeking investors.
REITs return value to shareholders in two ways: share price appreciation and dividend yield. REITs typically pay higher dividends than common equities due to their favorable tax structure. For example, REITs do not pay corporate income taxes, and return of capital distributions are tax-deferred. Additionally, REIT investors can deduct 20% of their dividends from their taxable income. However, it is important to note that REIT dividends are taxed as regular income, and some REITs may have high management and transaction fees.
High return-of-capital REITs can provide tax-efficient income for investors. These REITs return capital to shareholders, which can be tax-deferred until the shares are sold. Individual REIT shareholders can deduct 20% of the taxable REIT dividend income they receive, but not for dividends that qualify for the capital gains rates. Investing in high return-of-capital REITs can be a tax-efficient way to generate income, but it is important to do thorough research and understand the risks associated with these investments.
By Roger K. Olsson