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REIT investors face lower taxes in reform bill


According to Market Intelligence, December 2022


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REIT investors face lower taxes in reform bill

The new Republican tax plan will include lower taxes on dividends for investors of real estate investment trusts, The Wall Street Journal reported.

Under the plan, investors are allowed to deduct 20% of their dividend income, with the remainder taxed at the filer's marginal rate. Dividend income mainly comprises rent or mortgage interest. Capital gains from sales of properties are not included in the deduction.

REIT shareholders who pay the top income-tax rate of 39.6% on received dividends would have to pay 29.6% under the new plan, the publication noted, citing the National Association of Real Estate Investment Trusts, or NAREIT.

REITs would remain an attractive choice for real estate investors, and the move could even lead to increased demand for REIT shares. Investors earning rental income outside of a REIT structure could have to pay taxes at the top level of 37% under the new bill, the Dec. 19 report noted.

The commercial real estate sector has been deemed a likely "winner" under the new tax plan, according to multiple experts.

The Senate voted 51-to-48 to pass the Republican tax bill early on the morning of Dec. 20 but the measure faces another vote before moving to the president.

Capital gains distribution from REITs is expected to continue to be taxed at 20%, the Journal noted, citing NAREIT.

David Miller, a partner in the tax department of Proskauer Rose LLP, pointed out that there has never been a lower tax rate for rent and mortgage interest received through REITs, according to the publication.

The report also pointed out that commercial property values are likely near a cyclical high and at a time of slowing rental income growth, the tax plan's provisions might not be as notable as other business fundamentals of the real estate market.