While the Federal Tax Reform has negatively impacted several industries, REITs are winning from it. The Senate Amendment highlights a particularly large benefit the new law has on qualified dividends:
"For taxable years beginning after December 31, 2017 and before January 1, 2026, an individual taxpayer generally may deduct 23 percent of qualified business income from a partnership, S corporation, or sole proprietorship, as well as 23 percent of aggregate qualified REIT dividends, qualified cooperative dividends, and qualified publicly traded partnership income."
So, what exactly does this mean for you? The deductible is going from 0% to 23%. Therefore, $10,000 of qualified REIT dividends brings a $2,300 deduction toward an individual's taxable income and if you're already an owner of a REIT, you are receiving a dividend raise as you'll soon be able to keep a larger piece of the income. A couple of other considerations for REITs, Real Estate companies, and Construction companies include:
Lower Tax on Pass-Through Business Income
Creates a deduction available to pass-through filers of 20% on pass-through income subject to certain limitations. This includes “qualified real estate investment dividends.” Qualified REIT dividends do not include any portion of a dividend to which capital gain tax rates are applied.
What's at stake for Real Estate and Construction companies?
Reduced tax burden for real estate and construction companies structured as pass-through entities. This is a big win for real estate.
What's at stake for REITs?
Reduces the overall effective tax rate on REIT dividends received by individuals.
Expansion of Section 179 Deduction
Expands the definition of qualified real property to include improvements to nonresidential real property including roofs, heating, ventilation, air conditioning, fire protection, alarm systems, and security systems.
Increases the amount companies can deduct in purchases from the current ceiling of $510,000 to $1 million and increases the phase out threshold to $2.5 million.
What's at stake for Real Estate and Construction companies?
Eases the tax burden of financing property improvements.
What's at stake for REITs?
There is no real impact from the increased Section 179 deduction as REITs generally do not elect Section 179 expensing.
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