By Morgan Hopkins on Thursday, 18 January 2018
Category: Uncategorized

The Impact of the Tax Cuts and Jobs Act of 2017 on REIT Investors & Corporations

The Tax Cuts and Jobs Act of 2017 (“TCJA”) was passed by Congress and signed by President Trump.  The new law includes changes that will impact REIT investors and REIT corporations.  Commentators believe the law changes will also have indirect impacts that may economically benefit REIT investors and REITs.  The post below provides REIT investors with some of the details of the TCJA provisions applicable to corporations and their investors.

A) Potential Impact of TCJA on REIT Investors:

Primary changes relate to how taxes are charged to the recipient of REIT dividends.  As a result of the TCJA, investors in the highest tax bracket may see the effective tax rate charged on REIT dividends received (after application of certain new deductions permitted under TCJA) reduced from the previous 39.6% to 29.6%.  The chart below summarizes these changes.

REIT Dividend Treatment  Pre-TCJA Post-TCJA
Dividend Character - Taxable (income) Ordinary Income Qualified REIT Dividends ("QRD")
Dividend Character - Tax Deferred (Return of Capital) Reduction of Tax Basis of Investment Reduction of Tax Basis of Investment
Highest Applicable Tax Rate 39.6% 37%*
Combined Quallified Business Income Deduction ("CQBID") N/A 20%
Effective Tax Rate on QRD's (including CQBID) 39.6% 29.6%**

*This rate is prior to the effect of the CQBID, as applicable.  If the investor is unable to use the CQBID deduction, this will be the highest tax rate.

**This represents the highest tax rate of 37%, net of the benefit of the CQBID 20% deduction from income.

B) Potential Impact of TCJA on REIT Corporations

Material changes affecting REITs, as a result of the TCJA include the following: 

In general, REITs are often desired by investors looking for a stable investment with fixed income characteristics.  The after-tax yield of an investment in REIT stock is often a significant factor for investors comparing alternative investment opportunities.  REIT investors may want to take the anticipated tax deferred (return of capital) portion of the targeted annual dividend into consideration as an important aspect of their investment analysis.  In this analysis, they would have considered that the taxable portion of the annual dividend could have been taxed at a federal tax rate as high as 39.6% prior to passage of the TCJA.  With the TCJA tax benefits attributable to the CQBI deduction, investors may now be able to realize reductions in marginal federal tax rates by as much as 10%, providing an immediate increase to the after-tax yield on their investment.

In addition, REIT corporations may benefit from increased depreciation expense deductions with the potential to further reduce the taxable portion of the dividends received (reported on the annual form 1099). 

These and other new provisions under the TCJA are in many cases quite onerous. Each REIT or owner could end up with vastly different results depending on their income, gross receipts, type of business model, tax rate structure, entity structure, etc. Careful, thoughtful, customized analysis is going to be the right policy to apply these all of these new principles.

 For more information on how your REIT could be impacted contact Mark Blood or Morgan Hopkins Today!

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