Real estate provides an investment opportunity that can further diversify your investment portfolio. If you’re planning on investing in real estate, you may be interested in REITs or REIT ETFs. A real estate investment trust (REIT) is a company that seeks to invest in or finance income-producing real estate across a range of property sectors.
They allow you to invest in real estate in a similar way you’d invest in stocks. With a REIT, you’ll purchase shares in real estate portfolios and receive income in the form of dividends and potentially enjoy capital appreciation from your investment. If you’re looking to invest in multiple REITs, consider REIT ETFs.
What Are REIT ETFs?
A REIT ETF is an exchange traded fund that invests in the equity of other REITs and any REIT-related securities and derivatives. REIT ETFs can earn income from dividends, property rentals, and capital gains from the sale of properties. REIT ETFs strive to provide you with consistent income.
REIT ETFs are run similarly to REITs by investing passively into a basket of REITs and distributing any income to shareholders. They are managed by a company that understands the real estate market and offers you an alternative way to invest in this industry.
REIT ETFs differ from REITs by providing the opportunity to invest in portfolios from multiple REITs instead of limiting your investments to one. You can invest in diverse property types and manage your risk by investing in numerous portfolios with REIT ETFs.
Another benefit of REIT ETFs is that they may be considered a more convenient way to create and manage your investment portfolio because investors won’t have to deal with the complexities of researching and building a REIT portfolio and handling multiple accounts.
The ETF provides diversity, all handled through one investment account. It can simplify managing your assets and potentially make it easier to calculate your taxes.
You can invest in REITs and REIT ETFs by purchasing shares on your own or as part of mutual funds or retirement plans. REIT ETFs can also be bought or sold through brokers and are handled like stocks.
How Are They Taxed?
REIT dividends can be taxed at different rates because they can be allocated to ordinary income, capital gains and return of capital. You may receive dividends from your REIT ETF throughout the year and are required to pay taxes on any income you receive. Most REITs and REIT ETFs are taxed at normal income rates.
Individual investors in REIT ETFs only have to pay taxes on their dividends and capital gains once. Your REIT ETF company will send you a 1099-DIV form so you can report your dividends and earnings to the IRS.
You will need to pay tax on any capital gains earned through the sale of properties in your REIT ETF. Your capital gains are taxed at 0%, 15%, or 20%, depending on your level of income. Income and dividends earned from rent and mortgage payments are taxed at standard income rates based on your tax bracket.
You may be able to deduct up to 20% of income and dividends under the qualified business income deduction. If your REIT ETF is part of your IRA or 401(k) retirement plan, you will not have to pay taxes on your earnings until you withdraw money from these accounts.
