The Exciting New Benefits of REITs
The benefits to REITs under the Tax Cuts and Jobs Act of 2017 are not yet widely known to most investors. REITs have historically outperformed the S&P 500 but are now even more attractive investments thanks to tax reform. Below is a list of some of the new benefits available to REIT investors:
- 20% deduction on pass-through income from REITs
- The deduction can be taken even if not itemizing
- Reduces tax rate on REIT dividends from 39.6% –> 29.6% at top bracket
- Typically, the 20 percent pass-through deduction is limited to whichever is greater – 50 percent of wages paid by the business or 25 percent of wages, plus 2.5 percent of the property’s original purchase price. However, REIT dividends have been excluded from the wage restriction and thus don’t have any cap on how much can be deducted
- REITs with corporate tenants (ex: retail, office or industrial REITs) benefit because their tenants now are taxed at a lower rate, which makes these tenants more profitable and thus more stable
“Notably, the new Qualified Business Income (QBI) deduction under Section 199A is available for direct investments in real estate as well. However, direct real estate investments only qualify for the deduction if the amount of real estate investment activity amounts to a real estate “business” (where purely passive real estate investment income may not count) and is further limited for certain high-income individuals due to wage-and-depreciable-property tests that apply to married couples with taxable income above $315,000, and all other filers with taxable income about $157,500. By contrast, qualified REIT dividends simply obtain the 20% Section 199A deduction, implicitly counting as a real estate “business” (by virtue of a REIT’s size and scale), and without any high-income limitations on the deduction!”
Kitces.com | The Section 199A Tax Benefits of REITs Over Direct Real Estate Investments, Michael Kitces, Nerd’s Eye View
Additionally, a great valuation rift has arisen between small cap and large cap REITs with the small caps being significantly cheaper.
- The 30 largest REITs trade at an average of 18.1X consensus 2019 FFO
- The 30 smallest REITs trade at an average of 12.5X consensus 2019 FFO
To take advantage of this opportunity, 2nd Market Capital is raising $30mm in a REIT dedicated fund – solely to accredited investors – called Corsaires High Income Value Equities, LLC or “CHIVE” which will be used to invest in fundamentally strong REITs at a good value.
Additional details are included in CHIVE’s Private Placement Memorandum, which is available to accredited investors only and is posted on the Company’s offering portal at https://chive.2ndmarketcapital.com/.
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