Most folks would find it challenging to build a commercial real estate portfolio on their own. But using a Real Estate Investment Trust or REIT, an individual can buy a share in a commercial real estate portfolio and make money the same way the big real estate investors do: receiving income generated by renting, leasing or selling the real estate.
A qualified REIT is a corporation, trust, or association managed by one or more trustees or directors. There must be at least 100 shareholders in a REIT and the ownership must be evidenced by transferable shares or certificates of beneficial interest. There are different types of REITs: retail, residential, healthcare, office buildings, and mortgage.
REITs provide high dividend yields along with moderate long-term capital appreciation. Look for companies with strong management that have done a good job historically at providing both.
A REIT will receive special tax treatment as long as it pays out at least 90% of its income as dividends. A REIT is also a pass-through entity which means it does not pay federal income tax at the corporate level, but instead passes the income (but not the losses) to the shareholders.
Under Tax Reform things got even better for REITs: qualified REIT dividends may be eligible for the pass-through deduction under section 199A. As always with the IRS though, special rules apply. Income generally needs to be active income to qualify for the pass-through deduction, and there are holding period rules, etc.
REITs may also form Opportunity Zone Funds to acquire and develop properties in qualified disadvantaged areas in distressed communities and receive favorable tax treatment. Specifically, if the investments qualify, capital gain on the sale of assets can be deferred and reduced – potentially to zero. You may want to read our article on Opportunity Zones here: Are You Taking Advantage of the Investment Opportunity Act?
Keep in mind all investments have pros and cons. REITs are not risk free, so be sure to get educated before investing. You may want to consider buying a mutual fund or ETF that invests in REITs, and leave the research and buying to the experts. Check with your Fuoco Group tax professional if you have questions about how investing in a REIT might impact your tax bill.
Everyone’s investment goals are unique – TFG’s 360 degree, “whole”-istic approach can help you reach yours. Feel free to contact me, Cory Lyon, directly at 561-209-1120, with any questions regarding financial investment strategies. At TFG, we believe in customized investment portfolio design and personalized asset management. I act as a fiduciary for all my clients.
TFG Financial Advisors, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.
