Retirement & Financial Planning Report

Real estate investment trusts (REITs, rhymes with sweets) are similar to mutual funds. They can hold multiple properties. If REITs pass through 90% or more of their income to investors, no corporate income tax will be due. Thus, REITs can offer relatively high yields: an average of 3.5%-4%, as of this writing.

What’s more, the payout that you receive per year may not be the same as the taxable income that’s reported. Deductions (especially depreciation deductions) will reduce the taxable income reported to investors from REITs. Therefore, you might receive a 4% distribution but owe tax only on 2%, in a given year.

In this scenario, the untaxed 2% lowers your “basis”–your cost, for tax purposes. When you eventually sell REIT shares, the lower basis will increase your tax bill. However, that tax probably will be owed at capital gains rates (now no more than 15%) instead of ordinary income rates (which go up to 35% now), so you can benefit from tax deferral and tax reduction.

Many REITs trade like stocks. In addition, several mutual funds offer a diversified portfolio of REITs to investors.