New Tax Law May Favor REIT Investors

REIT Investing and the New Tax Law | Sheaff Brock

New Tax Law May Favor REIT Investors

The Tax Cuts and Jobs Act is set to deliver significant tax savings over the next decade, which might well help an already healthy economy, says JR Humphreys, portfolio manager of the Sheaff Brock Real Estate Income & Growth strategy.

Here’s why, Humphreys continues: One of the central features of the tax bill is a 20% deduction on pass-through income. By law, REITs must distribute at least 90% of their income. And, since the REITs themselves do not pay tax on distributed income, those tax savings are passed on to the investors. Shareholders may be able to deduct that 20%, even if they don’t itemize deductions on their federal tax returns, Rebecca Lake points out in U.S. News. (Needless to say, investors should consult their own tax advisors before drawing conclusions about the impact of the tax rules in each individual case.)

In addition to the favorable tax treatment on REIT distributions, Humphreys offers insight into several other factors that appear to bode well for investors in REITs:

  1. In the past few quarters, many investors, fearful of a rising interest rate environment, avoided REITs, equating them with fixed-income investments such as bonds.
  2. In the wake of recent mergers and acquisitions, private equity firms have been very active in property acquisition. In fact, reduced corporate tax rates may have the effect of increased economic activity, which has the potential of increasing the demand for real estate.
  3. Many REITs can trade at a discount to NAV, meaning for less than the group of actual properties in the REIT are worth.

Perhaps most significant, Humphreys stresses, is the Sheaff Brock Real Estate Income portfolio’s emphasis on opportunities for investors to participate in long-term capital appreciation. While companies are selected first with an eye to managing downside risk, the inclusion of property holdings in growth industries such as cellphone technology, warehousing to support e-commerce, and greenhouse farming add upside potential. “We don’t look to mirror an index,” the portfolio manager explains.

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