A real estate investment trust (REIT) is a company that owns and manages income-producing real estate. REITs specialize by property type. They invest in most major property types with nearly two thirds of investments made in office buildings, multi-family, shopping centers, regional malls, and industrial facilities. The rest is divided among hotels, self-storage facilities, health-care properties, and some specialty REITs that own anything from prisons, theatres, and golf courses to timberlands.
REITs are required to distribute at least 90% of their taxable income to shareholders each year as dividends; the REIT is permitted to deduct dividends paid to shareholders from its taxable income. For tax treatment purposes, REIT dividend distributions are allocated as; ordinary income, capital gains and return of capital, each of which may be taxed at a different rate. Investors can receive nontaxable income sheltered by deductions.
REITs offer strong long-term total returns that are not correlated with the overall securities markets. According to modern portfolio theory, investors should seek out investments in sub-assets classes whose investment returns do not correlation with the overall securities market. REITs have higher Sharpe ratios, in general, compared with other capital markets alternatives. The Sharpe ratio shows how efficient portfolio returns are relative to risk assumed in the portfolio. This measurement is very useful as a tool when deciding what assets to use in building a portfolio. The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been.
A financial advisor can help you determine what portion of your investment portfolio should be invested in:
- Publicly Traded REITs
- Non-traded REITs
Beginning in 2013, a 3.8% surtax (enacted pursuant to the Patient Protection and Affordable Care Act, commonly known as “Obama Care”) on investment income (such as dividends and capital gains) applies to individuals with adjusted gross income in excess of $200,000 and couples with adjusted gross income in excess of $250,000.
Qualified Dividends and capital gains of individuals with adjusted gross income in excess of $200,000 and below $400,000, and couples with adjusted gross income in excess of $250,000 and below $450,000, are taxed at a maximum rate of 18.8% (15% maximum rate, plus 3.8% surtax on investment income). Qualified Dividends and capital gains of individuals and couples in excess of these thresholds are taxed at a maximum rate of 23.8% (20% maximum rate, plus 3.8% surtax).
