REIT’s and MLP’s receive a 20% tax deduction

REIT’s, or Real Estate Investment Trusts, and MLP’s, or Master Limited Partnerships (a/k/a Publicly Traded Partnerships) can provide decent yields and should be considered for a portion of your investment portfolio.  The 2017 tax law became effective for 2018 and has sweetened the pot for REIT and MLP investors.

The tax law now provides a 20% deduction for Qualified Business Income (Sec 199A) or QBI.  If you have your own business it was a new deduction on your 2018 Form 1040.  Not to be overlooked, this new deduction also applies to dividends from REIT’s and MLP profits shown on the Sch. K-1. (Note: With MLP’s you do not pay tax on the distributions but instead you have to wait for your Sch K-1.  Some do not like MLP’s for that reason and the reporting of multiple K-1’s can complicate your 1040.)

A few highlights to remember:

  • There is a new box on Form 1099-B (issued on your investment accounts) that reports Sec 199A dividends that are eligible for this 20% deduction.
  • The tax rate on qualified dividends is only 15% for many taxpayers. The 20% deduction lowers the effective tax rate to 12% on your REIT dividends.
  • When comparing yields of REIT’s to other investments you juice your REIT yield by that 3% difference. For example, an 8% REIT effectively earns 8.24% or a 6% REIT gets a 6.18% effective yield if it was a traditional stock.

It may not seem like a big benefit, but it is a nice little gift.  A dollar saved is a dollar earned!