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No. of Recommendations: 5
[...]

In fact, the tax treatment of REITs by the IRS makes them ideal candidates for IRAs and other retirement accounts. For one thing, because REITs are considered pass-through investments, their dividends are typically considered ordinary income (not qualified dividends) and therefore are taxable at whatever your marginal tax rate (tax bracket) is. In retirement accounts, there is no dividend tax due at the end of the year, nor is there any capital gains tax due on investor profits from the sale of any investment. In a traditional IRA, you won't pay a penny of tax until you withdraw, and in a Roth IRA, qualified withdrawals are not taxable at all.

This is a unique double tax advantage for retirement investors. Not only does REIT income avoid taxes on the corporate level, but if you hold your publicly traded REIT investments in the right account type, REIT distributions can avoid tax liability entirely. This can help your REIT dividends compound much more over long periods of time, as you can reinvest your entire distribution, not just what's left over after paying taxes.

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https://www.fool.com/millionacres/taxes/reit-taxation/what-t...

Chuck
(who has focused his REIT investing in a beneficiary IRA from his father)
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No. of Recommendations: 6
(who has focused his REIT investing in a beneficiary IRA from his father)

Sorry for your loss. I hope if your father died on or before 12/31/19, you have been taking RMDs. And if he died on or after 1/1/20, be aware that you only have 10 years to fully empty the account. In either case, if you want to keep the same portfolio allocation, you will probably need to start purchasing REITs in another account.

AJ
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No. of Recommendations: 4
Not all REIT dividends are non qualified dividends. The amount considered as Nondividend distribution(Return of capital) are used to reduce cost basis and therefore increase the amount of capital gain upon sale. They are tax deferred and tax preferred outside an IRA/401K. We also have a temporary benefit of Qualified Business Income(QBI) which allows you to exclude 20% of it from taxation again outside an IRA/401K. The non qualified dividends are the amount that qualifies for QBI. Finally gains on sale of assets are capital gains; although some of those gains are subject to depreciation recapture. If you are in the 10% and just about all of the 12% bracket your capital gain rate is zero.

As you age the value of the tax deferral also declines as you withdraw those funds because of Required Minimum Distributions(RMD) or simply the need to fund your retirement. As the national debt continues to increase also ask yourself what is the risk of tax rates going up!

In summary holding REITS in an IRA has its benefits but there are also substantial offsets to this.
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No. of Recommendations: 4
The one REIT type that I like to hold in a taxable account are timber REITs. The two timber REITs that I have owned paid 80-100% of their distribution as long-term capital gains.

As a retiree and under the current tax federal tax law, I pay 0% federal tax on my first $40-45k in long-term capital gains and qualified dividends.

At the state level (Arkansas), I get to reduce my long-term capital gains by 50%. My state gives no advantage to qualified dividends of 199A.

VM - Long RYN
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No. of Recommendations: 2
"As a retiree and under the current tax federal tax law, I pay 0% federal tax on my first $40-45k in long-term capital gains and qualified dividends."

This is an outstanding tax place to be; however the 0% federal tax rate isn't on your first $40-45k in long-term capital gains but the zero rate is only in effect if your total taxable income is less than $80,801 if married or $40,401 if single. The trap is if your income exceeds these amounts by just $1 you fall off a cliff for ALL of your 0% tax capital gains & qualified dividends; the capital gains/qualified dividends tax reverts to 15%. In other words its not just the excess but the ENTIRE capital gains/qualified dividend becomes taxable @15%.
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No. of Recommendations: 1
The trap is if your income exceeds these amounts by just $1 you fall off a cliff for ALL of your 0% tax capital gains & qualified dividends; the capital gains/qualified dividends tax reverts to 15%. In other words its not just the excess but the ENTIRE capital gains/qualified dividend becomes taxable @15%.

That doesn't sound correct to me. I'm not a tax expert, but as I understood it, only the amount over the $80,800 (married, filing jointly) limit is taxed at 15%. Then anything over $501,601 is taxed at 20%.

Am I wrong?

Jim
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No. of Recommendations: 2
Jim,

You are correct, it is the amount over those thresholds you mentioned. I do 3 family 1040s a year and do the worksheet by hand and it is clear from the worksheet that some can be taxed at 0% while some is taxed at 15%, perhaps even 20%.
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No. of Recommendations: 3
Thanks Yoda. Do drop in again.

I wonder what you and Ralph would do if we had to do a fifty year portfolio today.

klee12
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No. of Recommendations: 0
I stand corrected & apologize for the confusion.

If your total income including the capital gains exceeds these thresholds then the capital gain is considered stacked on top of the other income and the higher 15% rate applies. Here is a calculator...
https://www.nerdwallet.com/article/taxes/capital-gains-tax-r...

What can happen is your other income can push not all capital gains but the amount of the other income & capital gains tax that exceeds these thresholds by 15 percentage points. So the marginal tax rate on this increased other income(say a draw from a retirement account)can be for instance 12%(your ordinary income tax bracket) plus 15% or 27% total on the capital gain that is no longer zero taxed.

Corrections or disputes of course appreciated.
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