Beware of the REIT Dividend
Sunday, February 8, 2009 16:29A recent IRS ruling will cause the dividend on REIT’s to disappear this year while costing the investor in taxes.
The December ruling allows REIT’s to skip on the longstanding requirement to pay 90% of pretax income to shareholders in cash. The companies will be allowed to keep the money instead of paying investors.
REIT’s can now pay 90% of their dividend in stock (and only 10% in cash). Stock dividends are similar to stock splits as they give the investor more shares of the stock but the price per share is reduced because of the extra supply of shares. In other words, stock dividends and stock splits have a net effect of zero for the investor. The value of their holdings does not change.
The Problem: 100% of the dividend will be taxable to the investor. That means the investor would have to pay more in taxes than they actually received in the cash portion of their dividends An example would look like this:
ABC REIT is required to pay you $10,000 for the year. Instead of the normal $10,000 cash payment, this year you receive:
$1,000 in cash and $9,000 in stock dividends.
If your in a 35% tax bracket, you’ll owe the IRS $3,500 eventhough the only cash you received is $1,000.
Even if you’re taxed at a qualified dividend rate of 15% , you’ll still end up owing more than you received.
If you own a REIT, you should check that companies website and find out what there policy is regarding dividend payments. Find out how much will be paid in stock dividend. The IRS ruling allows them to pay UP TO 90% in stock dividends and so the actual amount may vary by company.
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