Real estate investment trusts (REITs) have gained popularity in the past few years, thanks in part to tax benefits enacted under the 2017 Tax Cuts and Jobs Act. But it takes careful planning to receive the best tax treatment on your REIT. Here are a few tax advantages and planning factors to consider when investing in a REIT, based partly on the Financial Advisor article “REITs, and Their Tax Benefits, Grow in Popularity” featuring our own Arthur Khaimov.
REIT Tax Advantages
The 2017 Tax Cuts and Jobs Act created the IRC Sec. 199A qualified business income deduction, (“QBI”) allowing non-corporate taxpayers to deduct up to 20% of their qualified REIT dividends and qualified publicly traded partnership income. There are no wage restrictions or caps on the deduction, and taxpayers don't need to itemize their deductions to receive the QBI deduction.
Therefore, in a REIT structure, the QBI deduction can benefit high-net-worth individuals, as non-REIT structures may have income limitations. Although currently set to expire at the end of 2025, there was a bill introduced (The Main Street Tax Certainty Act), which proposes to extend the QBI deduction indefinitely.
In addition, REITs generally don't pay corporate income taxes as they distribute their earnings as dividends to shareholders. REITs also allow U.S. investors to invest nationally in a pool of diversified properties without exposure to multi-state tax filings, as well as other benefits for foreign and tax-exempt investors.
