Reit ETF - Accumulating - Bogleheads.org (2024)

FAQs

What is the 90% rule for REITs? ›

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

REIT ETFs are a smart investment for most retail investors. They provide professional REIT selection and excellent diversification in a single, highly liquid security that trades like an individual stock.

Equity REIT ETF dividends are generally taxed at the investor's ordinary income tax rate, while mortgage REIT ETF dividends are generally taxed at the investor's long-term capital gains tax rate. 2. Tax Bracket: The taxation of REIT ETF dividends also depends on the investor's tax bracket.

The main differences between a real estate ETF vs. REIT lie in how they're structured, dividend payouts, taxes, and the fees investors might pay to own them. Also, REITs are considered alternative investments, which means they tend not to move in sync with traditional investments like stocks and bonds.

The REIT's ownership (which must be proven by transferable shares or by transferable certificates of beneficial interest) must be held by at least 100 shareholders for at least 335 days of a 365-day calendar year (or equivalent thereof for a short tax year) for the second taxable year and beyond.

For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.

REITs must prioritize short-term income for investors

In exchange for more ongoing income, REITs have less to invest for future returns than a growth mutual fund or stock. “REITs are better for short-term cash flow and income versus long-term upside,” says Stivers.

When investing only in REITs, individuals incur more risk than when they are part of a diversified portfolio. REITs can be sensitive to interest rates and may not be as tax-friendly as other investments.

Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.

ETFs can bypass taxable events using the in-kind redemption process, while also purging their portfolios of low-cost-basis securities to help portfolio managers avoid realizing large gains if they must sell holdings. But not all ETFs create and redeem shares in kind.

Do you pay capital gains on REITs? ›

If the REIT held the property for more than one year, long-term capital gains rates apply; investors in the 10% or 15% tax brackets pay no long-term capital gains taxes, while those in all but the highest income bracket will pay 15%.

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

Direct real estate offers more tax breaks than REIT investments, and gives investors more control over decision making. Many REITs are publicly traded on exchanges, so they're easier to buy and sell than traditional real estate.

Invest at least 75% of its total assets in real estate. Derive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate. Pay at least 90% of its taxable income in the form of shareholder dividends each year.

In situations where all investors submit cash election forms, the dividend payout formula will result in all shareholders receiving their distribution as 20% cash and 80% stock, which means that the cash/stock dividend strategy functions analogously to a pro rata cash dividend coupled with a pro rata stock split.

Invest at least 75% of total assets in real estate, cash, or U.S. Treasurys. Derive at least 75% of gross income from rent, interest on mortgages that finance real estate, or real estate sales. Pay a minimum of 90% of their taxable income to their shareholders through dividends. Be a taxable corporation.

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.