By CJ Follini | NOYACK Logistics
November 30, 2022
Part 5: Taxes
Investment returns can be taxed in one of two ways. The first is capital gains, which is when an investment’s price increases between the purchase and sell date. If an investor bought a stock for $20 and sold it for $25, they will owe $5 in capital gains taxes. If they hold the asset for less than a year before selling it, they will pay short-term capital gains, meaning the gains will be added to their taxable income and overall federal income taxes. If they held the investment for a year or longer, they will instead pay a long-term capital gains tax where their return is taxed based on specific income-driven brackets that are generally lower than their federal income tax brackets.
Investment returns can also be taxed if an investment directly passes along income such as dividends for stocks and interest for bonds. In most instances, this income is added to someone’s taxable income and taxed based on their federal income tax brackets. One notable exception is qualified dividends.
Unique REIT Tax Considerations
REITs operate with a unique structure that create some differences in how investors incur and pay taxes. That’s because REITs are required to pass along at least 90% of their taxable income to shareholder, which means that this distribution is the primary means through which an investor is taxed.
Within this distribution, income can be classified into one of three categories that each have different tax implications:
REIT Tax Benefits
In addition to its unique structure, REITs also have some unique tax benefits that can serve investors. The first is the 20% Qualified Business Income Deduction, which may allow REIT managers to deduct up to 20% of operating profit income from their taxes. Investors will receive this tax benefit regardless of their taxable income, which makes this deduction incredibly compelling.
Second, REITs avoid double taxation. For many investments like stocks, businesses must pay a corporate income tax on the company’s yearly taxable income. These taxes directly reduce how much money that a company can either reinvest in the business or distribute to investors. REIT managers do not have to pay corporate income taxes, which increases the pool of money that managers pass to investors via distributions.
*Please consult a tax professional about your personal portfolio and tax needs.*
Future articles in this series will dive into the various ways that our logistics REIT can add value.
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