This page details the types of REITs and tax:
- Equity REITs
- Mortgage REITs
- Hybrid REITs
- REIT Tax
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).
Including REITs in a diverse investment portfolio can help build long-term wealth and provide income, but creating a successful financial plan or investment strategy requires carefully weighing the risks and targets.
Types of REITs
Equity REITs
They earn revenue primarily through leasing space and collecting rents on the properties they own.
This category includes a wide variety of sectors, such as retail malls, office buildings, industrial parks, and apartments.
Equity REITs offer investors the potential for income through dividends and capital appreciation through property value increases. They are the most common type of REITs investing option available on the market.
Mortgage REITs (mREITs)
They earn income from the interest on these financial assets. Unlike Equity REITs, which directly invest in real estate properties, mREITs focus on the financing side of the real estate market.
MREITs are more sensitive to interest rate fluctuations, which can affect their borrowing costs and the value of their mortgage securities. This sensitivity makes mREITs a higher-risk, potentially higher-yield investment.
Hybrid REITs
Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs. This dual approach allows hybrid REITs to diversify their income streams, balancing the direct ownership of real estate with the financing of real estate.
Hybrid REITs can adjust their portfolio strategies based on market conditions, potentially offering a balanced risk-return profile to investors.
REIT Tax
When you invest in REITs, you receive dividends that the IRS treats as ordinary income. The REIT taxation applied is your marginal rate.
However, part of these dividends might qualify as capital gains or return of capital, subject to different tax treatments.
Capital gains dividends arise from the REIT selling assets at a profit. Investors pay capital gains tax on these dividends, which often has a lower rate than the tax on ordinary income.
Dividends classified as a return on capital reduce your investment’s cost basis, deferring taxes until you sell the investment.
Investors in REITs must also consider the implications of Unrelated Business Taxable Income. If a REIT engages in business activities unrelated to its primary real estate business, it might generate UBTI, affecting tax-exempt investors like IRAs.
REITs investing requires careful tax planning. Consult with a tax advisor or financial advisor to understand the specific impacts on your investment portfolio and strategies to optimize your after-tax returns.
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