When Real Estate Investment Trusts (REITs) are sold, any profit realized from the sale is subject to capital gains tax. This tax applies to the difference between the selling price of the REIT shares and their original purchase price (cost basis).
Understanding Capital Gains Tax on REIT Sales
Capital gains tax is levied on the profit you make from selling an asset, such as shares in a REIT. The tax rate you pay depends primarily on how long you held the REIT shares before selling them. This is categorized into short-term and long-term capital gains.
Short-Term vs. Long-Term Capital Gains
The duration for which you hold the REIT shares significantly impacts the tax rate applied to your profit:
- Short-Term Capital Gains: If you sell your REIT shares after holding them for one year or less, any profit is considered a short-term capital gain. These gains are taxed at your ordinary income tax rate, which can be higher than long-term capital gains rates.
- Long-Term Capital Gains: If you sell your REIT shares after holding them for more than one year, any profit is classified as a long-term capital gain. These gains generally qualify for preferential, lower tax rates, which can be 0%, 15%, or 20% for most taxpayers, depending on their taxable income.
It's important to differentiate this from how REIT dividends are taxed. While profits from selling REIT shares are subject to capital gains tax, the majority of dividends distributed by REITs are typically taxed as ordinary income at the investor's marginal tax rate. This is because, by law, REITs are required to distribute at least 90% of their taxable income to shareholders.
General Capital Gains Tax Rates (Illustrative)
Here's a simplified overview of general long-term capital gains tax rates. Short-term capital gains are taxed at your regular income tax bracket.
| Taxable Income (Single Filer, 2023) | Long-Term Capital Gains Rate |
|---|---|
| Up to $44,625 | 0% |
| $44,626 to $492,300 | 15% |
| Over $492,300 | 20% |
- Note: These rates are illustrative and subject to change by tax law. Consult current IRS guidelines or a tax professional for the most accurate and up-to-date information.
Practical Insights for REIT Investors
Navigating the taxation of REITs, both from sales and dividends, requires careful consideration:
- Holding Period Strategy: To potentially benefit from lower tax rates, aim to hold your REIT shares for longer than one year to qualify for long-term capital gains treatment upon sale.
- Cost Basis Tracking: Meticulously track your purchase price (cost basis), including any reinvested dividends or share splits, as this directly affects the calculation of your capital gain or loss when you sell.
- Tax-Advantaged Accounts: Consider holding REITs in tax-advantaged accounts, such as an IRA or 401(k), especially if you are concerned about the ordinary income taxation of REIT dividends. While sales within these accounts typically aren't taxed until withdrawal (and then as ordinary income), it can defer or change the nature of the tax burden.
- Professional Advice: Tax laws can be complex and are subject to change. It is always advisable to consult with a qualified tax advisor for personalized guidance regarding your specific investment situation and tax planning.
Understanding these tax implications is crucial for maximizing your returns and effectively managing your investment portfolio when dealing with REITs.
