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"What happens within the REIT is irrelevant to your tax situation."

So basically what you're saying is that it doesn't make any sense from a tax point of view to buy REIT shares with tax sheltered money because the tax sheltering nullifies anything that happens within the REIT.

More specifically, in terms of a tax deferred annuity, I would pay a marginal rate on everything--return of capital, dividends, and any increase in share value--whereas if I bought just a REIT, I would pay a marginal rate on a portion of my dividends every year, and then a one time capital gains tax on my ROC and any share value appreciation.

Right. There is no tax advantage.

There's no "synergy" between the REIT and the TDA that would allow me to pay capital gains taxes on my ROC and a ONE TIME marginal tax on my dividends and share appreciation.

There is no way to have anything taxed at capital gains rates within the TDA.

A more general question--do REIT index funds maintain the tax benefits of individual REITs?

I don't know, I don't invest in REITs. But as a side note, I don't know of any tax benefits for any REIT. If you are looking at the ROC portion of the annual cash payout as a tax benefit, I'd say that's questionable as a benefit. The share price of the REIT will generally decrease by the amount of each payout. The ROC is a real reduction in the value of the REIT based on disposition of its property.

Ira
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