As part of the Tax Bill passed by Congress a Senate Amendment has huge implications for shareholders of REITs.
Presently, REITs are generally held in qualified accounts because financial planners often advise their clients to not hold REITs in taxable accounts due to the different tax treatment of REIT dividends. While the dividends of most stocks are taxed at the dividend rate, REIT dividends are considered non-qualified and are taxed as ordinary income. Thus, REITs are presently excluded from a sizable source of capital (individual taxable investment accounts) that would otherwise benefit from the diversification and returns REITs provide.
As REIT dividends currently have no deduction, the marginal impact here is immense. Going from 0% deductible to 23% deductible is a bigger change than just about anything else in the tax bill.
For clarity, this means $10,000 of Qualified REIT dividends results in a $2,300 deduction toward one’s taxable income.
With this change that introduces a 23% deductibility to REIT dividends, the taxation will be brought much closer to parity, give or take a little depending on which tax bracket people fall into. There will no longer be a reason to exclude REITs from taxable accounts which unlocks a vast source of capital that can now flow into REITs.