Trump tax plan could bruise REITs
May 1, 2017 | by Will Parker | The Real Deal
On Wednesday, Treasury Secretary Steven Mnuchin and National Economic Director Gary Cohn laid out the basic principals of the White House’s tax reform plan. While scant on many important details, it hinted at some major changes: Taxes for corporations and other businesses, including pass-through entities like LLCs and S corporations, would go from the current top marginal rate of 35 percent (plus local tax) to 15 percent, and individual rates would go from a seven-bracket system to just three, a massive shift that could change the incentive structure for numerous investments.
One of the investment vehicles that could be significantly impacted by these tax shakeups is the real estate investment trust, or REIT.
REITs do not pay corporate tax and in exchange are required to pay out 90 percent of their returns to stockholders, mostly in the form of dividends. Because of that tax-exempt status, REITs offer yields that are higher than the average S&P 500 corporate stock. Their shareholders, however, pay ordinary income tax on those dividends, with a maximum rate of 39.6 percent under current law.
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