Personal Finance

Tax Cuts and Jobs Act: Tax Break for Real Estate Investment Trust Investors

Senior Estate Planner Mike Repak explains some of the implications of certain aspects of the new tax law.

A Real Estate Investment Trust (REIT) is a business entity that primarily invests in real estate, or in mortgages on real estate, such as apartments, shopping centers, hotels, medical facilities, offices, self-storage units, and industrial buildings. Funds from numerous investors are combined to make designated long-term real estate investments. Most of the investment income that is generated by the REIT is passed through to the individual investors.

REITs have been a popular strategy for investors seeking investments in income-producing property who may not want to own the property directly. The newly enacted Tax Cuts and Jobs Act (TCJA) creates a tax advantage for REIT investors that could make these investments attractive for some investors. One of the more intriguing provisions of the TCJA is the creation of a new deduction for qualified business income paid to owners of pass-through businesses. Almost all REITs should be able to qualify under this provision, which would allow owners to claim a deduction up to 20% of all of the income which they receive. Some REITs distribute both ordinary income and dividend income, and it would only be the ordinary income that would be eligible for this deduction. Tax-deferred investments would still be taxable at normal rates as distributions are made. Although this would still be higher than the rate charged to qualified corporate dividends or capital gains, it would be less than the rate charged to taxable-interest income, which is still taxed at ordinary income tax rates.

The 20% deduction is available in full for married taxpayers (filing jointly) whose taxable income is $315,000 or less or single taxpayers up to $157,000. For married taxpayers whose income is $315,000 to $415,000, or single taxpayers with income from $157,000 to $207,500, there’s a reduced deduction available. Interestingly, the many owners of pass-through entities that are personal service companies have other hurdles to clear before they can claim a deduction for pass-through income. However, in most cases, REIT investors will not have to worry about these. Talk to your tax advisor to determine your specific circumstances.

An important takeaway from this development is that the investment arithmetic for REIT investors has been changed. Also, the new law retained the ability for the REIT to use IRC Sec. 1031 to defer gains upon selling real property. Your tax advisor can help you determine the applicability of this consideration to your particular situation. In concert with your tax advisor, we can help you determine if owning shares in a REIT may be right for you. Contact us today for more information.

Michael Repak, CPA/PFS, JD, LLM
Vice President/Senior Estate Planner

Mike provides advice and guidance in all aspects of financial, tax, and estate planning issues. He earned his Bachelor’s degree from William Paterson University in Wayne, New Jersey, and has a Master’s degree from the University of Wisconsin in Madison, Wisconsin. He has a CPA/PFS credential, and Series 7 and 66 securities licenses. He received his J.D. from the University of Florida and his LL.M. in Tax Law from NYU. 

He has been an adjunct professor in the MBA program at Temple University and is a sought-after speaker for professional conferences and events. He is also frequently featured as a Money Doctor on, the public education site of the American Institute of Certified Public Accountants. Mr. Repak has served on several non-profit and civic boards, is a graduate of Leadership Philadelphia, and a member of the Union League of Philadelphia.

The information presented herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. Please consult with your tax advisor for specific guidance relative to your particular situation.

Janney Montgomery Scott LLC Financial Advisors are available to discuss the suitability and risks involved with various products and strategies presented. We will be happy to provide a prospectus, when available, and other information upon request. Please note that the information provided includes reference to concepts that have legal, accounting, and tax implications. It is not to be construed as legal, accounting, or tax advice, and is provided as general information to you to assist in understanding the issues discussed. Neither Janney Montgomery Scott LLC nor its Financial Advisors (in their capacity as Financial Advisors) give tax, legal, or accounting advice. We would urge you to consult with your own attorney and/or accountant regarding the application of the information contained in this letter to the facts and circumstances of your particular situation.

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