Author Topic: REIT investing in the new tax plan  (Read 2201 times)

boarder42

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REIT investing in the new tax plan
« on: December 06, 2017, 07:40:42 AM »
Ignore the title of this click bait article.  But look into the underlying changes.

https://www.cnbc.com/2017/12/06/tax-plan-crowns-a-big-winner-trumps-industry.html

What i gather is now i can borrow money to invest in REITs AND right off all my interest just as i would with a mortgage.

AND

I will now be taxed more similarly to LTCG's and QDs with a REIT. 

To me this sets up a scenario thats really great for an early retiree with some extra capital in their taxable plan.  It would allow you to essentially do what ARS and other RE guys have done with leverage only now you have no leg work and get a huge diverse portfolio by purchasing REITs. 

I havent dug into the tax plan and investing on margin is a poor mans game typically - but when we're talking the RE world its typically much more secure. 
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radram

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Re: REIT investing in the new tax plan
« Reply #1 on: December 06, 2017, 08:02:33 AM »
Am I reading this right that my rental income could now be treated the same as long term capital gains, effectively 0% tax for some amount near $70,000 for married filing jointly?

And if not immediately so, I could just form a REIT and buy all the shares, and then get that tax treatment?

While I would find this utterly ridiculous, I would surly look into benefiting.

Funny how know one was preaching "simple" while discussing the Senate plans, like they were during House discussions.

boarder42

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Re: REIT investing in the new tax plan
« Reply #2 on: December 06, 2017, 08:08:30 AM »
Am I reading this right that my rental income could now be treated the same as long term capital gains, effectively 0% tax for some amount near $70,000 for married filing jointly?

And if not immediately so, I could just form a REIT and buy all the shares, and then get that tax treatment?

While I would find this utterly ridiculous, I would surly look into benefiting.

Funny how know one was preaching "simple" while discussing the Senate plans, like they were during House discussions.

i'm not sure if its exactly like LTCGs but i know they lowered the top tax rate to 25% at least thats what the article says.  i'm not sure how it treats income below this.
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Cromacster

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Re: REIT investing in the new tax plan
« Reply #3 on: December 06, 2017, 08:28:46 AM »
Interesting, posting to follow.

REIT aren't something I have added to my portfolio, but have been curious for a while.
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toganet

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Re: REIT investing in the new tax plan
« Reply #4 on: December 06, 2017, 08:35:49 AM »
PTF as well.  I sold off my REIT position earlier this year to buy a rental property, which is definitely a lot more work!

slugsworth

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Re: REIT investing in the new tax plan
« Reply #5 on: December 09, 2017, 01:17:24 AM »

And if not immediately so, I could just form a REIT and buy all the shares, and then get that tax treatment?

I was curious about this line of thought a while back and REIT's have to have a minimum of something like 100 owners - and the reporting expenses were not small.

radram

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Re: REIT investing in the new tax plan
« Reply #6 on: December 09, 2017, 06:18:06 AM »

And if not immediately so, I could just form a REIT and buy all the shares, and then get that tax treatment?

I was curious about this line of thought a while back and REIT's have to have a minimum of something like 100 owners - and the reporting expenses were not small.

Did not know that. Thank you for sharing.

DavidAnnArbor

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Re: REIT investing in the new tax plan
« Reply #7 on: December 13, 2017, 11:53:41 AM »
I have a Vanguard REIT index in my taxable account - so I guess I'll see these changes.
Borrowing to buy a REIT is an interesting idea in terms of the interest deduction.

boarder42

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Re: REIT investing in the new tax plan
« Reply #8 on: December 13, 2017, 12:05:03 PM »
yeah was hoping this would bring in someone who understood more of what was going on.... if it really is a loophole the FIRE community should be all over it - assuming we can get "REIT Mortgages" at reasonable sub 5% interest rates.
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Bateaux

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Re: REIT investing in the new tax plan
« Reply #9 on: December 13, 2017, 01:17:57 PM »
Keep us informed B42.  I own REITs both in 401k and in taxable accounts.  I did rent a property for a while and it was a pain in the ass.  I still own it, right now it's my adult childrens party pad.  I've got international travel IN my FIRE plans.  Owning rental wouldn't mesh with that for me.  REITs on the other hand would.   
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Timodeus

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Re: REIT investing in the new tax plan
« Reply #10 on: December 13, 2017, 01:18:21 PM »
I was just looking into an opportunity to invest in a private market REIT (mostly focused on multi-unit residential properties), I had explored the possibility of borrowing from a line of credit (interest on loan would be considerably lower than dividend). The margins were thin due primarily to taxes, so I decided against leverage. If any of the details presented in this thread turn out to be true with the new tax bill, I will definitely reconsider leverage (responsibly of course) for this investment.

BTDretire

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Re: REIT investing in the new tax plan
« Reply #11 on: December 13, 2017, 02:11:07 PM »
I was just looking into an opportunity to invest in a private market REIT (mostly focused on multi-unit residential properties), I had explored the possibility of borrowing from a line of credit (interest on loan would be considerably lower than dividend). The margins were thin due primarily to taxes, so I decided against leverage. If any of the details presented in this thread turn out to be true with the new tax bill, I will definitely reconsider leverage (responsibly of course) for this investment.
(responsibly of course) Private REITs can be very risky.
I have several public REITs, and several Preferred REITs.
 The preferreds generally are paying between 7% and 8%.
Generally try to buy them under the $25 par price. Make sure it is liquid,
some have low daily sales. Make sure it is Cumulative, meaning if the dividend
is suspended the dividend continues to accumulate. Note: a preferred dividend
cannot stop until the regular stock dividend is zero. Possible call date may have some bearing on your purchase.
 Fed just raised rates, which I thought would not be good for the preferreds, but mine went up on the news.
 I have some REITs that hold Malls, a little more risky, but two that I bought and sold with a profit, are up considerably, I wish I had held. TCO, PEI

 

DavidAnnArbor

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Re: REIT investing in the new tax plan
« Reply #12 on: December 13, 2017, 02:59:33 PM »
My Vanguard Reit Index was worth $71,357 at the end of 2016, and now is valued at $75,055, a modest 5.2% increase.
During that time the Reit provided $3,400 in dividends, or 4.8% rate based on the initial value of $71,357.

I'm not sure it makes sense to use leverage to get a 5% dividend rate. 

When people buy rental real estate properties, I'm under the impression a 10% rate of return is desired but I'm not really sure about that number.

boarder42

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Re: REIT investing in the new tax plan
« Reply #13 on: December 13, 2017, 04:31:45 PM »
My Vanguard Reit Index was worth $71,357 at the end of 2016, and now is valued at $75,055, a modest 5.2% increase.
During that time the Reit provided $3,400 in dividends, or 4.8% rate based on the initial value of $71,357.

I'm not sure it makes sense to use leverage to get a 5% dividend rate. 

When people buy rental real estate properties, I'm under the impression a 10% rate of return is desired but I'm not really sure about that number.

That's a total of 10% roi there.
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EfficientEngineer

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Re: REIT investing in the new tax plan
« Reply #14 on: December 13, 2017, 05:01:59 PM »
Definitely interesting.  I would love to hear from anyone else that has more information on this topic.

boarder42

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Re: REIT investing in the new tax plan
« Reply #15 on: December 14, 2017, 06:19:16 AM »
i want to investigate Daves numbers a bit. 

so mortgage rate today is 4% assuming we buy the same REIT he did with this mortgage rate AND that 4% interest is tax deductible as a business expense (i'd assume we'd all set up an LLC or something like that for each of to do this to keep the money separate from our money.)  Lets look at taking 20k and buying 100k worth of a REIT which makes it similar to a mortgage scenario.  4% interest on 80k the first year costs me 3200 and i make 5000 in dividends making my net profit after my deductible cost 1800 bucks -15%tax =1530 and i also have an appreciation in my REIT of 4800 that i wont have to claim today.  so my percent return on just dividend on my 20k is 7.6% thats really good. add to that 75% of the 4800 for taxes sake lets say and my total return on my 20k + a little bit extra investment is 25.65% obviously decreasing every year as i slowly pay off my "mortgage"

If this was possible it would be insane not to do it.  but banks would have to be able to loan money in this way similar to a mortgage for REIT investing.  thats the million dollar question here right?
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Proud Foot

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Re: REIT investing in the new tax plan
« Reply #16 on: December 14, 2017, 03:16:40 PM »
Ignore the title of this click bait article.  But look into the underlying changes.

https://www.cnbc.com/2017/12/06/tax-plan-crowns-a-big-winner-trumps-industry.html

What i gather is now i can borrow money to invest in REITs AND right off all my interest just as i would with a mortgage.

AND

I will now be taxed more similarly to LTCG's and QDs with a REIT. 

To me this sets up a scenario thats really great for an early retiree with some extra capital in their taxable plan.  It would allow you to essentially do what ARS and other RE guys have done with leverage only now you have no leg work and get a huge diverse portfolio by purchasing REITs. 

I havent dug into the tax plan and investing on margin is a poor mans game typically - but when we're talking the RE world its typically much more secure.

Are you not already able to do this? I don't know all the rules on deducting margin interest so I don't know if it is deductible if invested in REIT's. The tax changes would make REIT's a lot more attractive.

ILikeDividends

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Re: REIT investing in the new tax plan
« Reply #17 on: December 15, 2017, 04:32:24 PM »
Ignore the title of this click bait article.  But look into the underlying changes.

https://www.cnbc.com/2017/12/06/tax-plan-crowns-a-big-winner-trumps-industry.html

What i gather is now i can borrow money to invest in REITs AND right off all my interest just as i would with a mortgage.

AND

I will now be taxed more similarly to LTCG's and QDs with a REIT. 

To me this sets up a scenario thats really great for an early retiree with some extra capital in their taxable plan.  It would allow you to essentially do what ARS and other RE guys have done with leverage only now you have no leg work and get a huge diverse portfolio by purchasing REITs. 

I havent dug into the tax plan and investing on margin is a poor mans game typically - but when we're talking the RE world its typically much more secure.

Are you not already able to do this? I don't know all the rules on deducting margin interest so I don't know if it is deductible if invested in REIT's. The tax changes would make REIT's a lot more attractive.

Margin borrowing rates are so absurdly high, especially for small investors, that it would likely render this a losing approach.

At Schwab, it starts at 8.825% for small investors, and caps out at 7.075% even for the big fish.

You'd have to find a REIT with one whopper of a return to overcome that.
« Last Edit: December 15, 2017, 04:36:54 PM by ILikeDividends »

tralfamadorian

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Re: REIT investing in the new tax plan
« Reply #18 on: December 15, 2017, 06:40:38 PM »
Interactive Brokers is currently at 2.32-2.66% for margin so significantly less than mortgage debt. However, I would have some concerns about this- right now, margin is typically capped at around 1x of investment; mortgage debt is 3-4x. So my real estate investment dollar goes much further investing in the properties themselves

Also, stocks, and right now REITs, are subject to margin calls if the price falls below a predetermined threshold. Mortgage debt is not callable if the value of the property falls.  This second concern makes stock leverage significantly more risky than real estate leverage, to me.

I don't understand the nuances of the bill so maybe this risk is mitigated in some way.