The Schedule K-1 is a standard IRS form used to report activity related to partnership interests and is issued once a year. For investments in which you have a membership interest, the K-1 will disclose your share of any taxable items for the calendar year.
If you participate in a CrowdStreet Marketplace sale, you will typically own a membership stake in a real estate LLC (limited liability company) that is taxed as a partnership. As a result, the partnership’s taxable activity is allocated to all individual members (partners) based on ownership percentage and disclosed to investors via the K-1. The sponsor of the deal in which you have invested will issue you with a K-1.
Investors in a partnership-taxed LLC will receive a Schedule K-1, whereas REITs (real estate investment trusts) will issue a 1099 to disclose their taxable interest and/or dividends.
How many K-1s will I receive?
Any investor that invests in a Marketplace sale will obtain a single federal Schedule K-1. Investors who have made multiple investments on the Marketplace will get a federal Schedule K-1 for each investment.
Unless the real estate investment is held in a state that does not impose state income tax, you should also expect to receive a state K-1 for the state in which the property is located (also see the article “Do I need to file out-of-state tax returns and why?”).
Furthermore, if you transferred your investment from one entity to another throughout the year, you should expect to get a K-1 from each corporation that held the investment at any time during the year (i.e. two in total).
Will I still receive a K-1 even if I haven’t received a distribution yet and there is no income to report from the underlying real estate investment?
Sponsors should typically provide you with a Schedule K-1, which displays your allocable share of any real estate partnership revenue and/or loss items. If the real estate partnership’s property does not generate gross revenue or incur any amount that would be recognized as a deduction or credit for federal tax purposes, sponsors may refuse to issue a K-1. The majority of investments that fit this description are properties that are still in the planning stages. Because the building has not yet been put into service, no taxable revenue or deductible expenses have been produced during the development period.
- https://www.irs.gov/faqs/small-business-self-employed-other-business/entities/entities-4
Are REITs good for taxable accounts?
REITs are already tax-advantaged investments because their profits are shielded from corporate income taxes. Because REITs are considered pass-through corporations, they must disperse the majority of their profits to shareholders.
The majority of your REIT dividends will be classified as regular income if you hold them in a conventional (taxable) brokerage account. However, it’s likely that some of your REIT dividends will fall under the IRS’s definition of qualified dividends, and that some of them would be treated as a non-taxable return of capital.
Ordinary income REIT dividends meet the requirements for the new Qualified Business Income deduction. This permits you to deduct up to 20% of your REIT payouts from your taxable income.
Holding REITs in tax-advantaged retirement accounts, such as regular or Roth IRAs, SIMPLE IRAs, SEP-IRAs, or other tax-deferred or after-tax retirement accounts, is the greatest option to avoid paying taxes on them.
You can save hundreds or thousands of dollars on your investment taxes if you follow these guidelines.
Can a REIT be an MLP?
Under the United States’ federal tax code, real estate investment trusts (REITs) and master limited partnerships (MLPs) are both classified pass-through companies. The majority of business profits are taxed twice: first when they are booked and again when they are dispersed as dividends. REITs and MLPs, on the other hand, benefit from their pass-through structure, which allows them to avoid double taxation because their earnings are not taxed at the corporate level. While REITs and MLPs have comparable tax treatment, their business features differ in several respects.
How are REITs treated for tax purposes?
Dividend payments are assigned to ordinary income, capital gains, and return of capital for tax reasons for REITs, each of which may be taxed at a different rate. Early in the year, all public firms, including REITs, must furnish shareholders with information indicating how the prior year’s dividends should be allocated for tax purposes. The Industry Data section contains a historical record of the allocation of REIT distributions between regular income, return of capital, and capital gains.
The majority of REIT dividends are taxed as ordinary income up to a maximum rate of 37% (returning to 39.6% in 2026), plus a 3.8 percent surtax on investment income. Through December 31, 2025, taxpayers can deduct 20% of their combined qualifying business income, which includes Qualified REIT Dividends. When the 20% deduction is taken into account, the highest effective tax rate on Qualified REIT Dividends is normally 29.6%.
REIT dividends, on the other hand, will be taxed at a lower rate in the following situations:
- When a REIT makes a capital gains distribution (tax rate of up to 20% plus a 3.8 percent surtax) or a return of capital dividend (tax rate of up to 20% plus a 3.8 percent surtax);
- When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from
- When allowed, a REIT pays corporation taxes and keeps the profits (20 percent maximum tax rate, plus the 3.8 percent surtax).
Furthermore, the maximum capital gains rate of 20% (plus the 3.8 percent surtax) applies to the sale of REIT stock in general.
The withholding tax rate on REIT ordinary dividends paid to non-US investors is depicted in this graph.
Do REITs issue 1099?
Each year, if you own REIT shares, you should receive a copy of IRS Form 1099-DIV. This shows how much money you got in dividends and what kind of dividends you got:
The 1099-DIV instructions explain how to report each type of payment on your tax return.
Where do REITs go on tax return?
Dividend payments are a frequent technique to make these transfers. Dividends can be fully PID, entirely non-PID, or a combination of the two; on a dividend-by-dividend basis, the Board will determine the most appropriate make-up. Furthermore, the Scrip Dividend Alternative’s PID/non-PID make-up may differ from that of the underlying cash dividend.
PID & non-PID dividend payments
Shareholders should be aware that PID and non-PID dividends have different tax treatment. In the hands of tax-paying shareholders, PIDs are taxable as property letting income, but they are taxed independently from any other property letting revenue they may get.
Forms for requesting withholding tax exemption on PID dividend distributions are available:
- The PID from a UK REIT is included on the tax return as Other Income for UK residents who receive tax returns.
- Dividends received from non-REIT UK companies will be regarded in the same way as dividends received from REIT UK companies. From April 6, 2016, the non-PID element of dividends received by UK resident shareholders liable to UK income tax will be entitled to the tax-free Dividend Allowance (£5,000 for 2016/17) if they are subject to UK income tax. It should be noted that the PID component of dividends is not covered by this allowance.
- Any normal dividend paid by the UK REIT is included on the tax return as a dividend from a UK firm for UK residents who receive tax returns. Your dividend voucher will list your firm shares, the dividend rate, the tax credit (for 2016 and preceding years), and the dividend payable. Add the tax credit to the total dividend payments in box 4 on page 3 (box references are for the 2018 return).
Sale of shares by UK and non-UK resident shareholders
Gains realized by non-UK residents must be disclosed to HM Revenue & Customs within 30 days of the transaction.
Gains realized by UK citizens should be recorded as usual on the tax return.
Can I hold a REIT in my TFSA?
According to Royal LePage, the cost of a single-family home in Canada increased 14.1 percent year over year in the first quarter of 2021. This comes after a year of exceptional house demand, with month after month of sales and price appreciation records. Saving for a down payment on a home in Toronto might take as long as 24 years for a family with average income. The housing market in Vancouver isn’t much better, with most housing alternatives requiring a family to earn more than $150,000 per year.
Those that entered the market early and profited handsomely are now sitting on large sums of money. For the previous two decades, the average price of a home in the United States has increased by 6% every year. When you combine that rate of return with historically low interest rates and reasonable mortgages, it’s easy to see why so many seasoned landlords have amassed multi-million-dollar fortunes.
Let’s take the smart money’s advice. To get into this lucrative market, you don’t need to follow the typical route of requiring a down payment or mortgage approval. You can put your TFSA money into a Real Estate Investment Trust (REIT) (REIT). REITs are eligible to be invested in through existing or new TFSA accounts because they are registered funds. As a result, you’ll be able to invest in real estate while still contributing to your TFSA, making it a win-win situation.
REITs benefit from special tax status and are very tax efficient. Generally, you can postpone paying taxes until you sell your REIT investment, giving you more money to spend or reinvest each year.
If you’re searching for a safe, predictable, and tax-efficient monthly income, a private REIT is an excellent option.
A tax-free savings account (TFSA) is a scheme that began in 2009 and allows people aged 18 and above to put money aside tax-free for the rest of their lives. Even if you didn’t start a TFSA in 2009, you still have annual contribution room.
To put it another way, a TFSA allows you to save money without paying taxes on the growth or withdrawals from the account. However, just around half of Canadians are believed to have started a TFSA, so let’s look at the benefits.
The most major advantage of a TFSA is that any investment income earned by Canadians is not taxed. Unlike an RRSP, your savings will not only grow tax-free, but you will not be taxed on the withdrawal as well.
Another reason TFSAs are so appealing to Canadians is that your income has no bearing on your contribution limit! This is not the case with an RRSP, where the amount you can contribute each year is precisely proportional to your income.
Your contribution space will not be used up. There’s no need to fret if investors don’t use their whole TFSA contribution quota; the balance will be carried over to the next year.
Withdrawing funds from your TFSA is a breeze. This is not the case with RRSPs, where you must deal with difficulties such as withholding taxes, purchasing annuities, and opening RRIFs.
When you invest in a REIT with your TFSA, you receive exposure to the stock upside as well as leverage. In other words, purchasing these funds is similar to engaging a team of pros to buy real estate on your behalf. Given the current status of Canadian real estate, including a private REIT in your TFSA is an excellent idea for future investments.
Do REITs have to be registered with the SEC?
Many REITs (equity and mortgage) are registered with the Securities and Exchange Commission (SEC) and traded on a stock exchange. These are known as publicly traded real estate investment trusts (REITs). There are also REITs that are registered with the Securities and Exchange Commission but are not publicly traded.
What is the difference between MLP and REIT?
To begin with, REITs are corporations with standard management structures and shareholders, whereas MLPs are partnerships with “unitholders” (i.e., limited partners). When you buy in a REIT, you get a stake in the company, whereas MLP investors get units in a partnership.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
Weak Growth
REITs that are publicly listed are required to pay out 90% of their profits in dividends to shareholders right away. This leaves little money to expand the portfolio by purchasing additional properties, which is what drives appreciation.
Private REITs are a good option if you enjoy the idea of REITs but want to get more than just dividends.
No Control Over Returns or Performance
Investors in direct real estate have a lot of control over their profits. They can identify properties with high cash flow, actively promote vacant rentals to renters, properly screen all applications, and use other property management best practices.
Investors in REITs, on the other hand, can only sell their shares if they are unhappy with the company’s performance. Some private REITs won’t even be able to do that, at least for the first several years.
Yield Taxed as Regular Income
Dividends are taxed at the (higher) regular income tax rate, despite the fact that profits on investments held longer than a year are taxed at the lower capital gains tax rate.
And because REITs provide a large portion of their returns in the form of dividends, investors may face a greater tax bill than they would with more appreciation-oriented assets.
Potential for High Risk and Fees
Just because an investment is regulated by the SEC does not mean it is low-risk. Before investing, do your homework and think about all aspects of the real estate market, including property valuations, interest rates, debt, geography, and changing tax regulations.
Fees should also be factored into the due diligence process. High management and transaction fees are charged by some REITs, resulting in smaller returns to shareholders. Those fees are frequently buried in the fine print of investment offerings, so be prepared to dig through the fine print to find out what they pay themselves for property management, acquisition fees, and so on.
Why do REITs not pay taxes?
A REIT is required by law to deliver at least 90% of its taxable revenue in the form of dividends to its owners each year. This allows REITs to transfer their tax burden on to their shareholders rather than paying federal taxes.
