No. of Recommendations: 13
REIT investors were big winners from recent tax reform. Due to the new 20% QBI deduction, REITs are now essentially on par with typical qualified-dividend-paying companies when held in taxable accounts.

Well....maybe yes, maybe no. It depends on a couple of things.

If you're in the 22% bracket, most or all of your qualified dividends + net LTCG will be taxed at 15%. If some of these, when stacked on top of taxable ordinary income, are part in the 12% bracket and part in the 22% bracket, the tax rate on the QD + LTCG will be somewhat less than 15%.

REIT ordinary dividends are taxed as ordinary income. So if in the 22% bracket, will be taxed at 22%. The advent of the QBI deduction allows up to 20% of the ordinary income to be deducted from taxable income. But this has no effect on other forms of the dividend, such as LTCG, unrecaptured 1250 gain or Return of Capital.

Example:

For 2018, the shares of CLNY-B made the following dividend distributions for 2018 (I'm in the 22% Fed Bracket)


CLNY-B.................Gross Breakdown ........Taxable ....Tax rate ........Tax

Total Dividend ........ 900

Ordinary Dividend...... 424
Qualified Dividend................ 118.............. 118........ 15% .......... 18
Net Ordinary Div ................. 306.............. 245........ 22% .......... 54

Capital gain .......... 475
1250 gain ........................ 278 ...............278.........22% ..........61
LTCG ..............................197 ...............197 ........15% ..........30

ROC ............... 0 ...................................... 0% ...........0

199A ................306 ..........................(61)........-20%

Total .......................................................................162
Tax as Percent of Total Dividend .............................................18.0%
Tax as percent of Total Dividend with no 199A deduction ......................19.9%
Tax as percent of Total Dividend if 100% of dividend is 199A..................17.6%



Notice that the 20% of the 199A deduction is calculated based only the net ordinary dividend and not from the 1250 dividend which is also treated as ordinary income. In this case, the qualifying 199A exactly equals the net ordinary dividend minus any qualified divided, but this may not always be the case.

So yes, the 199A deduction will reduce the tax on most REIT dividends, but by how much below what it would have been without the 199A deduction will depend on the ratio of the various dividend parts. With CLNY-B, the difference is only a couple of percentage points.



BruceM
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