REIT dividends are divided into three categories: capital return, capital gain, and ordinary dividend. The specific nature of the dividend depends on the REIT’s investment strategy, which can be found in the prospectus. Investors should analyze different types of REITs to determine which is best for their investment strategy.
REIT dividends come in several types, with different tax rates. Since real estate investment trusts, or REITs, are set up in a variety of ways, it makes sense that REIT dividends should be divided into several categories. Looking at the different REIT dividends will help investors make sense of the earnings and returns they can expect from these specialized financial products.
REITs are a specific type of opportunity to invest in real estate. The government has provided regulations for REITs to make sure they operate as they should. One such rule is that the REIT must distribute the majority of its current income through dividends.
The three main classes of REIT dividends are a “capital return”, a “capital gain” and an ordinary dividend. Returning principal generally does not carry a tax rate. Experts describe this as an investor return on investment, where there may be some tax burden down the road depending on related sales events. There is also capital gains, which occur when the REIT sells assets, and capital gains are taxed at normal capital gains rates, where there are two rates for short-term and long-term gains.
A common dividend from a REIT, on the other hand, comes from the operation of the trust, often in the lease of ownership. In this case, the gain is subject to a “full marginal tax rate,” which is determined by the investor’s net worth and other factors. REIT dividends can be thought of as part of a larger class of “common dividends” such as those that an investor gets by remaining invested in a particular stock or fund.
In addition to these general categories, the specific nature of a REIT dividend has a lot to do with the general functioning of the REIT itself. Different types of REITs have very different investment strategies, where what leadership does with its money will determine what type of dividend will be paid. A real estate investment trust may focus on buying and/or leasing property, buying mortgages, or trading some rather abstract mortgage securities. All of these different strategies should be listed in the prospectus, which is what the investor looks at to determine the relative benefit and risk before buying into the fund. Investors can analyze diversified REITs and specific “flavors” of funds such as commercial, retail or residential REITs to figure out which ones are best suited to their particular investment strategy.
Smart Asset.
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