Reap the Tax Benefits of a REIT with Careful Planning

February 02, 2023

Real estate investment trusts (REITs) have gained popularity in the past few years, thanks in part to tax benefits enacted under the 2017 Tax Cuts and Jobs Act. But it takes careful planning to receive the best tax treatment on your REIT. Here are a few tax advantages and planning factors to consider when investing in a REIT, based partly on the Financial Advisor article “REITs, and Their Tax Benefits, Grow in Popularity” featuring our own Arthur Khaimov.

REIT Tax Advantages

The 2017 Tax Cuts and Jobs Act created the IRC Sec. 199A qualified business income deduction, allowing non-corporate taxpayers to deduct up to 20% of their qualified REIT dividends and qualified publicly traded partnership income. Initially set to expire at the end of 2025, the Inflation Reduction Act extended the IRC Sec. 199A deduction for another two years. There are no wage restrictions or caps on the deduction, and taxpayers don't need to itemize their deductions to receive the deduction. The IRC Sec. 199A deduction can benefit high-net-worth individuals, as non-REIT structures may have income limitations.

In addition, REITs generally don't pay corporate income taxes as they distribute their earnings as dividends to shareholders. REITs also allow U.S. investors to invest nationally in a pool of diversified properties without exposure to multi-state tax filings, as well as other benefits for foreign and tax-exempt investors

About Arthur Khaimov

Arthur Khaimov is a Tax Director in the Real Estate Group with over 15 years of experience providing tax consulting and compliance services to the real estate industry and other corporations.