The Cons of REITs – The Disadvantages that REITs don’t want you to know
The problem with traditional real estate investment trust is that it strips the wealth-generating power of commercial real estate. When wealthy investors want to buy real estate to grow their wealth, they will keep the real estate’s income and leave it in the company. They then reinvest it and purchase more real estate, thereby compounding their wealth. While the income stays in the corporation, LLC, or partnership, they’re able to take advantage of all the expense deductions and depreciation to minimize the tax at the corporate level. They are essentially reinvesting the income and their portfolio. This allows them to grow their wealth exponentially.
So what are the two main cons of REITs?
- New REIT Tax laws
- REIT Dividend taxation
New REIT Tax laws
The new tax laws regarding a real estate investment trust have made it so that at the corporate level, they avoid paying 21% (it used to be 35%), but when distributed to investors, investors are paying taxes on it at a personal level, which very often is a higher tax level than the corporation. This diminishes the growth potential of real estate investment and hinders the wealth-generating power that real estate has.
That is one of the key differences between a REIT and a REI Capital Growth Fund.
REIT Dividend taxation
A REIT typically does not meet the IRS definition of “qualified dividends,” which typically have a lower tax rate than traditional income.
REIT dividends are typically taxed higher than qualified dividends. The investor is entirely liable to pay tax on their interest and or dividends according to the Federal Income Tax Bracket. According to the Federal tax bracket rates, those in the 24% (and up) Taxable income bracket will be subject to substantial loss due to federal tax.
Also, note that C Corps and REITs don’t normally have capital gains tax. So when they sell, they pay ordinary income tax. This is why it’s much more efficient to buy the property and hold it forever.
REI Capital Growth Real Estate Fund VS REIT
With REI Capital Growth Equity Fund, taxes are paid at the corporate level, and currently, that rate is 21%. In addition to that, we will be able to take advantage of the depreciation and expense rules involved. Because we are consistently acquiring new properties year after year, the tax rate at the corporate level is going to be relatively small, which allows us to reinvest, creating a permanent capital vehicle. There are no tax consequences to the investors until they decide to sell their shares. Because we’re not going to be listed on a NASDAQ or Wall Street, we issue digital securities. These are listed on digital security exchanges, and they are growing like wildfire all over the world. As one of the first perpetual companies giving these digital security funds backed by US commercial real estate, we offer a unique product. We believe liquidity is going to come rapidly for us because of this structure. With an entire world of potential investors, we are now tax-efficient for not only our investors, but we’re tax-efficient for global investors.