What is the capital gains tax rate for assets held in a real estate investment trust (REIT)?
Learn about the capital gains tax rate for assets held in a real estate investment trust (REIT) and explore REIT taxation guidelines.
Real Estate Investment Trusts (REITs) are a unique investment vehicle that offers certain tax advantages, but the tax treatment of REIT dividends is different from that of traditional capital gains. Specifically, REIT dividends are generally taxed as ordinary income rather than as capital gains. Here's how it works:
REIT Dividends: REITs are required by law to distribute at least 90% of their taxable income to shareholders in the form of dividends. These dividends are often referred to as "REIT dividends" or "distributions."
Taxation of REIT Dividends:
- REIT dividends are typically taxed as ordinary income at the recipient's applicable income tax rates.
- If you receive REIT dividends, you will report them on your income tax return, and they will be subject to your ordinary income tax rates, which can vary based on your total taxable income and filing status.
Qualified Dividend Income: In certain cases, a portion of REIT dividends may qualify for the lower tax rates that apply to qualified dividend income. However, to qualify for this lower rate, the REIT must meet specific criteria, including holding and distribution requirements.
Capital Gains from Sale of REIT Shares: If you sell shares in a REIT, the gains or losses you realize from the sale are typically treated as capital gains or losses. The tax treatment of these gains depends on factors such as your holding period and the type of gain (short-term or long-term). The capital gains tax rates (0%, 15%, or 20%) apply to these gains, similar to the tax treatment of other investments.
It's important to note that while REIT dividends are generally taxed as ordinary income, they may be eligible for certain deductions or credits, and the tax treatment can vary based on individual circumstances. Additionally, state income tax laws can affect the overall tax liability for REIT dividends and capital gains.
To get the most accurate and up-to-date information on the tax treatment of REIT dividends and capital gains, it's advisable to consult with a tax professional or review the latest IRS guidelines and relevant state tax laws. REITs can provide attractive income and diversification benefits, but understanding the tax implications is essential for effective tax planning.
Capital Gains Tax Rate for REIT-Held Assets: REIT Taxation Guidelines.
REITs, or real estate investment trusts, are a type of company that owns and operates income-producing real estate. REITs are required to pay out at least 90% of their taxable income to shareholders in the form of dividends. This makes REITs a popular investment for investors who are looking for a steady stream of income.
REITs are also a popular investment for investors who are looking to defer capital gains taxes. When you sell REIT shares, you will only be taxed on the capital gains that you have accumulated since you acquired the shares. This can be a significant tax benefit for investors who have held REIT shares for a long period of time.
Capital gains tax rate for REIT-held assets
The capital gains tax rate for REIT-held assets depends on your holding period and your tax bracket.
Holding period: If you sell REIT shares that you have held for more than one year, you will be taxed on the capital gain at the long-term capital gains tax rate. If you sell REIT shares that you have held for one year or less, you will be taxed on the capital gain at the short-term capital gains tax rate.
Tax bracket: The long-term capital gains tax rates for 2023 are as follows:
- 0% for taxpayers with taxable income of $41,775 or less (single filers) or $83,550 or less (married filing jointly)
- 15% for taxpayers with taxable income of more than $41,775 but less than $459,750 (single filers) or more than $83,550 but less than $517,200 (married filing jointly)
- 20% for taxpayers with taxable income of $459,750 or more (single filers) or $517,200 or more (married filing jointly)
The short-term capital gains tax rates for 2023 are the same as the ordinary income tax rates, which range from 10% to 37%.
REIT taxation guidelines
In addition to the capital gains tax implications of selling REIT shares, there are a few other REIT taxation guidelines that investors should be aware of:
- Dividends: REIT dividends are taxed as ordinary income. This means that REIT dividends will be taxed at your regular income tax rate.
- Unrealized capital gains: REITs are not required to pay taxes on unrealized capital gains. This means that if you own REIT shares that have appreciated in value, you will not be taxed on the gain until you sell the shares.
- Tax treaties: The United States has tax treaties with many countries that can reduce the amount of capital gains taxes that you owe on the sale of REIT shares. If you are a foreign investor, you should consult with your tax advisor to determine if you are eligible for any tax treaty benefits.
Conclusion
REITs can be a tax-efficient way to invest in real estate. However, it is important to be aware of the capital gains tax implications of selling REIT shares before you invest. You should also consult with your tax advisor to determine how REITs will fit into your overall tax plan.