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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77137  
Subject: Re: REITs vs REIT preferreds? Date: 2/16/2013 6:09 PM
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REIT's, like passthrough entities, will have distributions that are usually a mix of tax characteristics, to include:

Ordinary income dividends that are not available for favorable tax treatment as qualifying dividends, as the REIT did not pay tax on the earnings that represent these dividends. This generally will represent the majority of a REIT's annual dividend distributions.

Ordinary income dividends that DO qualify for favorable tax treament, as these dividends have been taxed at the REIT level, usually as net income from a taxable REIT subsidiary. This amount, if it exists, is usually a small part of the REITs distribution, and most REITs will not have this form of dividend.

Long Term Capital Gains from the sale of appreciated properties. This varies depending on the REIT, although most long term stable REITs will not have much or any of their annual dividends as capital gains. Interestingly, the code does not require a REIT distribute realized capital gains. The REIT can keep the CGs, but must then pay a flat 35% tax, and the amount retained must become 'phantom' income to the shareholder who can then take a tax credit on the tax the REIT paid, and must adjust (increase) the basis of the shareholder's shares (in a taxable account) by the difference between the 'phantom income' and the amount of the credit. This is reported to you, that shareholder, on form 2439 for that year. But this does not happen very often, and in my experience, only tends to happen when the REIT is cash-distressed.

Short term capital gains. I don't think I've ever seen a REIT distribute STCG.

Unrecaptured Sec. 1250 (recpatured past depreciation) capital gains

Return of Capital (distributions that are in excess of distributions characterized by any of the above. Most REITs will have some ROC in their annual distributions. As previously mentioned, this is not taxed to the shareholder, but the shareholder must reduce their basis by the amount of ROC they receive in a given year).

Now, as to the above tax character of the distributions to a REIT's common and preferred shares......my experience is that all forms of tax character are distributed evenly between REIT common and REIT preferred dividends....with the exception of Return of Capital, which seems to be distributed disproportionately to the common share dividends. I've never seen anything written or heard anything spoken on what the requirements for distributions are based on tax characteristics, only my own limited observations.

Sorry for the long-winded answer to your simple question :-)

BruceM
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