Should REITs be in a TFSA?
There are many benefits to holding a REIT investment in a TFSA. Because you cannot own land in your TFSA, investing in a REIT is an excellent alternative.
Your current tax bracket and projected retirement tax bracket can impact these advantages — you'll get the most benefit if you expect to be in a higher tax bracket in retirement than you are now. Generally, the favorable tax treatment you receive through your shares in a REIT should be amplified by using a Roth IRA.
If you invested in the REIT outside of your Roth IRA, the dividends would be taxed as income. In many ways, investing in REITs in your Roth IRA is the ideal way to invest in a REIT. Their dividends greatly compound over time and you won't have to pay taxes on them when you reach retirement age.
REITs and REIT Funds
Real estate investment trusts are a poor fit for taxable accounts for the reason that I just mentioned. Their income tends to be high and often composes a big share of the returns that investors earn from them, as REITs must pay out a minimum of 90% of their taxable income in dividends each year.
Individuals can currently deduct 20% of the pass-through income coming from REIT investments. This can incentivize you to invest in a REIT right now as you may pay significantly less in taxes than you would have before this benefit was provided. There is no guarantee that this tax benefit will be extended beyond 2025.
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
REITs make it possible to invest in real estate without owning physical property. They're a suitable retirement investment for their strong dividends and growth potential. REITs can also offer more portfolio diversification.
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
REITs are a Potent Source for Retirement Income
On average, 70% of the annual dividends paid by REITs qualify as ordinary taxable income, 15% qualify as return of capital, and 16% qualify as long-term capital gains. Most income distributed from REITs is taxed as ordinary income rather than as dividend income.
Any real estate property you buy must be strictly for investment purposes; you and your family can't use it. Purchasing real estate within an IRA usually requires paying in cash, and the IRA must pay all ownership expenses. Holding real estate in your IRA can be tricky, with tax issues and red tape.
How do I avoid taxes on REIT?
Avoiding REIT dividend taxation
If you own REITs in an IRA, you won't have to worry about dividend taxes each year, nor will you have to pay taxes in the year in which you sell a REIT at a profit. In a traditional IRA, you won't owe any taxes until you withdraw money from the account.
Roth IRAs are funded with after-tax dollars. As a result, you don't have to pay taxes on your withdrawals, including your REIT dividends. If you invested in the REIT outside of your Roth IRA, the dividends would be taxed as income. In many ways, investing in REITs in your Roth IRA is the ideal way to invest in a REIT.
Holding REITs in retirement plans
If you hold an interest in a REIT as part of a tax-advantaged retirement savings plan, such as an IRA or 401(k), the different types of tax treatment don't really matter. That's because investment returns in such plans are not taxed when earned.
The majority of REIT dividends are taxed as ordinary income up to the maximum rate of 37% (returning to 39.6% in 2026), plus a separate 3.8% surtax on investment income. Taxpayers may also generally deduct 20% of the combined qualified business income amount which includes Qualified REIT Dividends through Dec.
Overview. A REIT is taxable as a regular corporation, but is entitled to the dividends paid deduction.
Unlike many companies however, REIT incomes are not taxed at the corporate level. That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.
REITs should generally be considered long-term investments
This is especially true if you're planning to invest in non-traded REITs since you won't be able to easily access your money until the REIT lists its shares on a public exchange or liquidates its assets. In many cases, this can take around 10 years to occur.
For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.
There is no set lifetime for the trust in most cases. Investors who buy publicly traded shares in a REIT can usually buy as much or little as they like and dispose of the shares when they want or need to. However, if an investor buys a non-traded or private REIT, the investment should be considered illiquid.
REITs allow investors to pool their money and purchase real estate properties. By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions.
Should I invest in REITs in my Roth IRA?
REITs are excellent candidates for retirement account investments. The tax-advantaged nature of retirement accounts can magnify the already tax-advantaged nature of REITs, which can result in some powerful long-term return potential.
After looking at correlation patterns and historical data, it appears that returns from REITs vary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates.
REITs invest in apartment buildings, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses.
Publicly traded property stocks, including real estate investment trusts (REITs) and real estate operating companies (REOCs), allow market participants to gain exposure to real estate, which is generally an illiquid asset class, without sacrificing the liquidity benefits of listed equities.
To buy REITs, you'll need to open a brokerage account with a brokerage firm or an online broker.
