Is it OK to hold REITs in a taxable account? (2024)

Is it OK to hold REITs in a taxable account?

This makes them a great type of dividend investment to hold in tax-advantaged retirement accounts like traditional IRAs, Roth IRAs, and 401(k)s. In this scenario, you wouldn't need to keep track of the cost basis from ROC. It's also okay to own REITs in taxable accounts.

Should a REIT be in a taxable account?

Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.

What type of account should I hold REITs in?

Your current tax bracket and projected retirement tax bracket can impact these advantages — you'll get the most benefit if you expect to be in a higher tax bracket in retirement than you are now. Generally, the favorable tax treatment you receive through your shares in a REIT should be amplified by using a Roth IRA.

Where is the best place to hold a REIT?

Is a Roth or traditional IRA the best choice? To be clear, retirement accounts are ideal places to hold REIT investments, as the benefits of tax-deferred investing can magnify the already tax-advantaged nature of these companies.

What should I put in my taxable brokerage account?

What are the advantages of REITs in a taxable account?

REIT Tax Advantages

There are no wage restrictions or caps on the deduction, and taxpayers don't need to itemize their deductions to receive the QBI deduction. Therefore, in a REIT structure, the QBI deduction can benefit high-net-worth individuals, as non-REIT structures may have income limitations.

Should I invest in taxable account?

Investments that are tax-efficient should be made in taxable accounts. Investments that aren't tax-efficient are better off in tax-deferred or tax-exempt accounts. Tax-advantaged accounts like IRAs and 401(k)s have annual contribution limits.

How do I avoid REIT dividend tax?

Avoiding REIT dividend taxation

If you own REITs in an IRA, you won't have to worry about dividend taxes each year, nor will you have to pay taxes in the year in which you sell a REIT at a profit.

How long should you hold a REIT?

REITs should generally be considered long-term investments

This is especially true if you're planning to invest in non-traded REITs since you won't be able to easily access your money until the REIT lists its shares on a public exchange or liquidates its assets. In many cases, this can take around 10 years to occur.

What is the 90% rule for REITs?

How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

Can a REIT go out of business?

What this means is that REITs are ideal borrowers for banks. They are exactly who they want to do business with because they know that the risk of a REIT bankruptcy is extremely low. Just look at the past. There have been very few REIT bankruptcies over the past 50+ years.

Will REITs recover in 2024?

But despite that, most REITs have kept growing their dividend. Most of them hiked in 2022, 2023, and will hike again in 2024. This is the ultimate proof that REITs are doing better than what the market appears to believe.

What is the downside of buying REITs?

Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.

Should you hold dividend stocks in taxable account?

Regular dividends are taxed as ordinary income, just like interest or work income, even if they are reinvested. Qualified dividends are instead taxed at the more favorable capital gains rate. Keeping dividend flows in tax-exempt accounts like a Roth IRA shields investors from these taxable events.

When should I use a taxable brokerage account?

A taxable brokerage account is a great place for surplus savings if you've already saved as much as the IRS will let you into your tax-advantaged retirement accounts. You may even start putting money into your taxable brokerage before you max out your retirement savings.

Is money sitting in a brokerage account taxable?

How Are Brokerage Accounts Taxed? When you earn money in a taxable brokerage account, you must pay taxes on that money in the year it's received, not when you withdraw it from the account. These earnings can come from realized capital gains, dividends or interest.

How is a REIT treated for tax purposes?

Unlike partnerships which are flow-through entities for tax purposes, REITs generally avoid entity-level tax by virtue of receiving a dividends paid deduction and by effectively being required to distribute all of their earnings and profits each year.

Can you avoid capital gains by investing in a REIT?

If the REIT held the property for more than one year, long-term capital gains rates apply; investors in the 10% or 15% tax brackets pay no long-term capital gains taxes, while those in all but the highest income bracket will pay 15%.

Why are REITs not taxed?

A REIT is taxable as a regular corporation, but is entitled to the dividends paid deduction. Therefore, a REIT does not pay federal income tax on net taxable income distributed as deductible dividends to shareholders. Net income from foreclosure property is taxed at 35 percent.

Should I invest in IRA or taxable account?

An IRA is designed specifically to save for retirement. Unlike a taxable brokerage account, which is used for general investing, contributions to an IRA may be tax-deductible, and the investments within the account can grow tax-free until they are withdrawn at retirement age.

Is it better to invest in 401k or taxable accounts?

Finally, 401(k) assets are subject to required minimum distributions at age 73. For investors who expect to be in a high tax bracket upon retirement, having assets in a taxable account—and enjoying more favorable taxation on the distributions—will be particularly beneficial.

What is the difference between a taxable account and a non taxable account?

Nontaxable accounts provide tax incentives up front, while taxable accounts allow an individual to save and invest funds above the contribution limits on IRAs and other retirement plans.

Can you live off REIT dividends?

Reinvesting REIT dividends can help retirement savers grow their portfolio's investment, and historically steady REIT dividend income can help retirees meet their living expenses.

What is the 5 50 rule for REITs?

A REIT will be closely held if more than 50 percent of the value of its outstanding stock is owned directly or indirectly by or for five or fewer individuals at any point during the last half of the taxable year, (this is commonly referred to as the 5/50 test).

How do I get my money out of a REIT?

While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.