Purchasing a REIT ETF through a discount brokerage account is the simplest option for investors to add REITs to their investment portfolio.
Instead of paying the ETF management charge, a savvy DIY investor could buy directly in a few individual REITs. By “skimming” the top 10 holdings of these REIT ETFs and then purchasing the individual REIT holdings using a bargain brokerage account like Questrade, you can do this.
How do I start a REIT in Canada?
To qualify as a REIT, a trust must be a publicly listed unit trust located in Canada that meets certain criteria set out in the Income Tax Act (Canada) (the “ITA”), including the nature and quantity of real estate assets owned and the sources of trust revenue.
Is REIT a good investment in 2021?
Three primary causes, in my opinion, are driving investor cash toward REITs.
The S&P 500 yields a pitiful 1.37 percent, which is near to its all-time low. Even corporate bonds have been bid up to the point that they now yield a poor return compared to the risk they pose.
REITs are the last resort for investors looking for a decent yield, and demographics support greater yield-seeking behavior. As people near retirement, they typically begin to desire dividend income, and the same silver tsunami that is expected to raise healthcare demand is also expected to increase dividend demand.
The REIT index’s 2.72 percent yield isn’t as high as it once was, but it’s still far better than the alternatives. A considerably greater dividend yield can be obtained by being choosy about the REITs one purchases, and higher yielding REITs have outperformed in 2021.
Investing in REITs (Canada) can help you minimize the risk of owning investment property
REITs (Canada), as the last remaining type of income trust, continue to make distributions before paying tax, which benefits unitholders. These real estate firms were exempt from the 2011 statute that ended tax benefits for other income trusts. They continue to be popular among Canadian investors looking for a reliable source of income with high development possibilities.
You can own income-producing real estate such as office buildings, shopping malls, and hotels by investing in Canadian REITs. They can save you money, time, and risk associated with owning investment property.
Real estate investment trusts (REITs) are similar to Canadian income trusts, but they invest in income-producing real estate.
Real estate investment trusts (REITs) can keep their exemption if they meet the following criteria:
- During a tax year, REITs cannot possess any property other than “qualifying REIT properties.”
- Rent or mortgage interest from real or immovable assets in Canada, as well as capital gains from the sale of such properties, must account for at least 75% of the trust’s revenue in any given tax year.
- At least 75% of the total fair market value of the REIT’s trust properties must be in cash (Canada).
How are REIT taxed in Canada?
The revenue and gains from a REIT’s property rental operation are not taxed in Canada. Instead, when a REIT’s property revenue is dispersed, shareholders are taxed on it, and some investors may be excluded.
How do you qualify as a REIT?
A corporation must have the majority of its assets and income linked to real estate investment and must distribute at least 90% of its taxable income to shareholders in the form of dividends each year to qualify as a REIT.
Can you lose money in a REIT?
- REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
- One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
- Investors find it difficult to sell non-traded REITs because they have low liquidity.
- When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.
Do REITs pay dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
Why REITs are bad investments?
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.
What are the largest REITs in Canada?
The top REITs in Canada have high debt-to-asset ratios, which are typically around 50%. Many are lower, although this is usually due to the REIT’s intention to borrow money to support its expansion goals. The ones at the top are frequently attempting to pay off debt.
- Dividend yield: 7.04 percent on Dream Industrial REIT Stock. The payout ratio for dividends is 53.38 percent. $1.57 billion in market capitalisation.
Dream may offer the best balance of value and development in the industry. After selling some of its lower-quality assets in 2019 and 2020, the REIT entered 2021 with 177 properties. It used the proceeds from the sales to pay down debt, and by 2021, it had a debt-to-assets ratio of roughly 30%. With such a low debt load, Dream was able to undertake a number of acquisitions, which it did.
- Dividend yield: 9.10 percent, dividend payout ratio: 116.01 percent. H&R REIT: Dividend yield: 9.10 percent, dividend payout ratio: 116.01 percent. $4.53 billion in market capitalization.
H&R is a real estate investment trust that is one of Canada’s largest. It is a well-diversified REIT with retail, industrial, and residential real estate assets distributed across North America. It has 40 million square feet of leasable space, allowing it to offer a high dividend yield to its stockholders.
- Dividend yield: 5.18 percent for Summit Industrial Income REIT. The payout ratio for dividends is 41.66 percent. $1.48 billion in market capitalisation.
Summit is one of the Toronto Stock Exchange’s top-performing growth stocks (TSX). It is a Canadian open-ended mutual fund REIT that invests in and manages light industrial assets. It has a high occupancy rate, which allows it to make a lot of money. Summit has a long-term dividend payment ratio and the opportunity to grow at an annual compounded rate of 8%.
Do REITs pay income taxes?
Understanding the tax implications of investing in a Real Estate Investment Trust (REIT) is one of the most important factors when adding commercial real estate investments to a well-balanced portfolio approach “When analyzing various options, REITs may be beneficial. Currently, Jamestown is offering Jamestown Invest 1, LLC (the) (the) (the) (the) (the) (the) (the) (the) “Fund”), which is available to accredited and non-accredited investors in the United States. The Fund is established as a REIT with the goal of acquiring and managing a portfolio of real estate investments in urban infill regions that are expected to grow. By the end of this article, you should be able to spot potential REIT tax benefits and better interpret your 1099-DIV form, as well as understand a few IRS rules relevant to REIT investments.
What is a REIT?
The United States Congress first introduced REITs in 1960. Until then, institutional investors were the only ones who could invest in commercial real estate. Most people lacked the financial means or resources to make important and diverse investments in the space. The REIT structure was designed by Congress to address this imbalance. Individual investors were able to pool assets and make major investments in commercial real estate by investing in a REIT.
You may have also heard that REITs are a time-consuming vehicle to manage, and this is correct! It is not, however, without justification. Congress has set various restrictions on the structure and operation of REITs in order to ensure that they meet their legislative goals. The REIT must maintain certain levels of investment in real estate assets and earn particular levels of income from real estate and other passive vehicles in order to be considered a passive real estate investor. There are special shareholder criteria and constraints on the concentration of ownership of REIT shares to ensure that money are pooled by individual investors. REITs that meet these criteria receive preferential tax treatment (discussed in more detail below).
How Are Realized Returns Determined?
Before going into some of the tax advantages of investing in a REIT fund, it’s crucial to understand how commercial real estate trusts create profits for investors. Operating distributions and capital gain distributions are the two components of real estate realized returns.
- Investors receive operating distributions (usually monthly or quarterly) from the cash flow generated by the fund’s underlying real estate investments. This is usually achieved by net rental income or portfolio income from the REIT, such as interest and dividends.
- The capital gain from the sale of real estate within the REIT is the second component of realized returns potential.
How Are Realized Returns Categorized?
A REIT must transfer the bulk of its taxable income to its shareholders in order to maintain its beneficial tax status. REIT distributions are classified into one of the following types. There is a different tax treatment for each category.
- Capital Gains — depending on whether the investment or its underlying property is kept for less than or more than 12 months, capital gains are taxed at a short-term or long-term capital gain rate.
If you recall from our post on How to Invest in Real Estate with a Self-Directed IRA, if you own a REIT in a tax-deferred account like a regular IRA, you only pay taxes on the money when you remove it.
What Are the Potential Tax Benefits of Investing in a REIT?
REITs are eligible for special tax treatment if they meet the IRS’s standards. Eligible REIT structures, unlike other U.S. corporations, are not subject to double taxation. Dividends provided to shareholders help REITs avoid paying corporate income tax. Shareholders may then benefit from preferential US tax rates on REIT dividend distributions.
The Tax Cuts and Jobs Act (TCJA), which was signed into law in 2017, made REIT investing even more tax-efficient. Many taxpayers are eligible for a tax deduction of up to 20% for Qualified Business Income under the TCJA, subject to specified income criteria. Ordinary REIT dividends, interestingly, qualify as Business Income for this reason, and REIT dividends aren’t subject to the income thresholds, thus REIT investors can take advantage of this provision regardless of their income!
The qualified business income deduction is equal to the lesser of (1) 20% of combined qualified business income or (2) 20% of taxable income minus the taxpayer’s net capital gain amount (if any).
The hypothetical after-tax return shown below is based on a $10,000 investment with a 7% yearly dividend yield. We’ll assume a single tax filer who has no capital gains and is in the highest federal marginal tax rate of 37 percent in 2020.
Will I Receive a Schedule K-1 or Form 1099-DIV?
Investors frequently inquire about whether they will receive a 1099 or a K-1 at the start of the year. While a Sponsor’s Investor Relations or Tax Team can provide this information, there are some general standards to be aware of before investing.
A REIT, brokerage, bank, mutual fund, or real estate fund issues Form 1099-DIV to the Internal Revenue Service. Persons who have received dividends or other distributions of $10 or more in money or other property will get Form 1099-DIV. Dividend income is taxed in the state(s) where the person resides, regardless of the location of the property.
Schedule K-1 is an annual tax form issued by the Internal Revenue Service for a partnership investment. Schedule K-1 is used to report each partner’s portion of the partnership’s profit, loss, deductions, and credits. Real estate partnership income may be taxed in the state(s) where the property is located. A Schedule K-1 is identical to a Form 1099 in terms of tax reporting.
Understanding your IRS Form 1099-DIV
If you invest directly in a REIT, you will receive a 1099-DIV from the REIT. You’ll find that numerous boxes on your Form 1099-DIV have already been filled in. Some of the reporting boxes and their ramifications were recently detailed in an article released by TurboTax, a market leader in tax software for preparing US tax returns.
- The percentage of box 1a that is considered qualified dividends is reported in box 1b.
- If you get a capital gain distribution from your investment, you must record it in box 2a.
- If any state or federal taxes were withheld from your dividends, report them in boxes 4 and 14 for federal withholding and state withholding, respectively.
REITs that comply with the law are exempt from paying corporate taxes. Ordinary and capital gain dividend income are taxed at the REIT shareholders’ respective tax rates. Ordinary dividends paid by REITs can be deducted up to 20% before income tax is calculated.
Built-in diversification without the hassle of several state income tax forms is an advantage of investing in a fund with exposure to multiple properties. In comparison to investing in numerous individual properties via partnerships, investors will only pay state taxes on their dividends and capital gains in their individual state(s) of residence.
While many people are aware with publicly traded REITs that offer the tax benefits we’ve discussed, combining some of these benefits with non-correlative private real estate may be a viable option for investors looking for a more diversified portfolio. Alternative investments have been a part of many high-net-worth individuals’ and institutions’ portfolios for decades, but they are still not a portfolio staple for many people.
How many Canadian REITs are there?
The majority of REITs in Canada are traded on public stock markets, providing excellent liquidity. There are 43 REITs listed on the Toronto Stock Exchange as of December 2019, with 19 of them included in the S&P/TSX Composite Index. Income that is consistent. In Canada, most REITs pay regular monthly dividends and offer good yields.
Can I hold REIT in 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.
