One of the most attractive features of Real Estate Investment Trusts (REITs) just got even better. Recent changes to federal law have made permanent a provision that allows investors to deduct 20% of ordinary REIT dividends from taxable income.
Here’s what that means in practice: if you receive $10,000 in REIT distributions, you won’t pay tax on the full $10,000. Instead, only $8,000 counts as taxable income. If you were in the 32% bracket, that’s $2,560 in tax, leaving you with $7,440 after tax.
Now compare that to a bond portfolio with the same $10,000 distribution. Bond interest is fully taxable, so at the same 32% bracket, you’d owe $3,200, leaving just $6,800 after tax.
Hanover’s REIT portfolio is currently yielding about 5.4%, and thanks to the permanent 20% federal deduction on ordinary REIT distributions, would deliver an after-tax yield closer to 4.0%. A taxable-bond fund with a similar nominal interest rate would yield just 3.7% after taxes. A 30-basis-point difference may not seem like much, but it compounds over time, creating a meaningful advantage for long-term investors.
It should be noted that not every dollar of REIT distributions is treated the same—some portions may be classified as a return of capital or as capital gains—but historically, the majority of REIT income qualifies for this permanent 20% deduction.
The bottom line is simple: similar yields, better after-tax results. This structural tax advantage makes REITs one of the most efficient income-producing investments available today.
At Hanover Advisors, we believe this change reinforces the value of including REITs in a diversified portfolio. If you’d like to learn how REITs could fit into your investment strategy, we’d be glad to discuss it with you.