New Federal Tax Laws Help REITs

New Federal Tax Laws are mandating significant tax breaks to people who invest in real estate trusts, or REITs as they are called.  You might want to know more about those new federal tax breaks.

A Little Background

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Plan for the New Federal Tax Laws and Real Estate Investment Trusts.

We are beginning to lose a generation. Not a day goes by without us hearing about the death of a baby boomer.  We might hear that a movie star, economic genius or ordinary person from the baby boomer generation has passed away. Thus it follows that that Generation X and millennials are inheriting real estate they might not even want.  Likewise, they are using inheritance money to buy real estate.

At any rate, these Generation X and millennials become fast-tracked into the world of landlords. And being a landlord is never as easy as it sounds. What’s more, they might be ill-equipped to manage the demands of tenants.

What If There Were an Alternative?

What if you could become a landlord in name only?  By this, we mean without the day-to-day demands of owning that apartment building or home?  Then, what if you could live the dream of real estate ownership without all the accompanying landlord responsibilities?  And what if you got new federal tax breaks to go with it?  Well, there is such a reality.

It’s called a Real Estate Investment Trust, and we have blogged about it previously. However, it has been quite a while since we visited the topic.  So, Gavrilov & Co thought this would be the perfect time to review it for you. Plus, let’s take a look at the new federal tax breaks for your REIT investment.

The Stress of Becoming a Landlord And the No-Stress Alternative

The stress-free version of real estate ownership is a real estate investment trust or REIT. It is not as difficult as it sounds. “…Firms sell shares to investors, use the cash to buy residential, commercial and industrial property to lease out, and pay dividends to shareholders.”

REITs Vs Owning the Property Directly:  Advantages

Income records from tips can be a journal or on IRS Forms
Advantages of Owning Property Have Changed With the New Federal Tax Laws

Available last year, and now making a comeback are some lucrative new federal tax deductions for Real Estate Investment Trusts. Let’s look at the numbers.

There are new forms and new provisions for investors. These are the deductions:

  • “Investors filing jointly with a taxable income of less than $315,000
  • and those filing individually with a taxable income of $157,000 — are eligible for a 20% deduction.
  • “Investors with higher taxable income — up to $415,000 filing jointly and $207,000, individually—are eligible for deductions on a reduced scale.”

Thus, you can see that the new tax rules are extending the allure of REITs and reducing the urge to buy directly. Why should you bother with unhappy tenants and broken plumbing?  “Real estate investment trusts are more attractive these days—direct involvement with property is less so.”

The New Tax Law:  A $10,000 Cap on State and Local Property Taxes

From last year’s tax returns, you probably remember the new $10,000 cap on the itemized deduction of your state and local taxes. Much of that comes from property taxes.  In previous years, people in NYC saw good deductions in previous years. That was the advantage built into the ownership of areas with high property values.

  • On the one hand, for direct “investors in residential real estate, especially in expensive areas, this new provision is paring down post-tax profits.”
  • On the other hand, these changes, along with the new deductions on REIT income, have improved the bottom-line for REIT shareholders.

Moreover, the new federal tax laws also include business-tax changes which bring nice benefits to REITs and to their investors. (The investors are share-holders, and hopefully, that means you…)

  • Keep in mind also that the new federal reduces the maximum allowable amount of the purchase price for mortgage interest deductions to $750,000.
  • In previous years, the government capped it at one million.

A Few Quick Review Notes:  REITs and You

Investing in a REIT could save you tax dollars and help with tax planning.
Real Estate Investment Trust: Meet Less Stressful Real Estate Ownership.

Most REITs are publicly traded like stocks, making them highly liquid — unlike most real estate investments.

  • Just like stocks, companies REITS “buy and sell on major exchanges throughout the trading day.
  • Did you know some REITs own property which owners can use for a variety of purposes? “Most REITs  however  but specialize, variously owning real estate used for apartment buildings, health-care facilities, hotels, shopping malls, commercial office parks and industrial property for factories, on-line retailing fulfillment centers, and server farms.”
  • They even own cell phone towers!
  • Well-managed, your REITs will serve you well and create reliable dividends. pay fairly reliable dividends. However, they can encounter problems resulting in losses being passed on to investors in the form of pummeled share value.

To qualify as a REIT under federal mandate, companies commit to paying a minimum of 90% of its profits to shareholders. Companies pay taxable dividends as well as in return of capital. And that capital is tax-deferred.

Direct Vs. Indirect Real Estate Investment

With direct investment in brick and mortar homes and businesses, “Many direct real estate investors assume that values will rise over time.”  Of course, we know there are no guarantees in the world of direct real estate investment.The money gained from property sales might not compensate for the cumulative cost of maintaining the property.

Unless you thrive on midnight calls for maintenance and repair, you will find a REIT investment far more superior to being a landlord.  What’s more, the new federal tax laws will increase your bottom line in the big picture of your economic life.  At any rate, if you are on the verge of investing either in actual property or REITs, be sure to consult with your tax planning expert at Gavrilov & Co.

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