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Investors looking for passive income often choose between Real Estate Investment Trust (Reit) and dividend shares, which both provide regular payments. However, their tax treatment is different and can affect total yields. AND Financial advisor I can explain the tax differences between the Reit -a dividendi shares and help you choose the option for your portfolio.
Real estate investment trust is structured as transient entities, which means they do not pay corporation income tax as long as most of their earnings distribute shareholders. This allows investors to receive high dividend payments, but these distribution is taxed differently from traditional dividends.
Reit dividend are usually divided into three categories for tax purposes:
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Ordinary dividends of revenue. Most reit distribution is one category and taxes at the regular income tax rate, which can be as much as 37% for top earnings.
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Capital gain distribution. A smaller part of the Reit dividend can be classified as a long -term capital gain, which are taxed decreased rates of 0%, 15%or 20%, depending on the investor revenue level.
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Capital Return (Roc). Some Reit distribution are classified as capital return, which is not taxed immediately. Instead, this reduces the basis of the cost of investors in Reit, delaying taxation until the shares are sold.
Dividend shares distribute profit to shareholders in the form of cash payment, which can be classified as qualified or unqualified dividends for tax purposes. The way these dividends are taxed depends on whether the shares of the criteria for qualified dividend treatment fills.
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Qualified dividends. They are taxed at a favorable long -term rate of capital gains of 0%, 15%or 20%, depending on the investor’s income. In order to qualify, the investor must hold stocks for at least 60 days within 121 days around the date of former dividend dividend.
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Non -ocvalified dividends. They are taxed as ordinary income at the border tax rate of investors, similar to Reit dividend. This usually refers to dividends from certain external corporations, Reit -and some business development companies.
Reits and dividends shares are taxed differently, which affects the investor’s income after taxation and the overall return. Here are five differences you should consider between them:
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Usually the taxation of income on the Reits in relation to lower tax rates for qualified dividends. Most Reit distribution is taxed as ordinary income, which can be as much as 37% for the best earnings. Qualified dividends from traditional dividendi shares, relatively, are taxed at the lower long -term rate of capital gains, ranging from 0% to 20%, depending on the revenue level. Because of this, dividend shares generally make taxes more efficiently on taxable accounts.
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Return of capital advantage to Reit. Some Reit Dividende are classified as capital return, which refuses to tax a decrease in investor the basis of the cost. This can provide a tax advantage in the short term, but the taxes will eventually be owed when the Reit shares are sold. Dividend shares usually do not offer this benefit.
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Best placement of tax efficiency account. Since Reit dividends are taxed at higher rates, they are often best held on accounts that are favorable for tax like Ira and 401 (k) swhere dividends taxes can be delayed or avoided. Dividend dividends that pay skilled dividends can be more tax more effective on taxable brokerage accounts.
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Reit -I have to distribute 90% of taxable income. Reit -I require law to distribute to shareholders at least 90% of their taxable income, which often results in high Dividends yields. Traditional dividend shares have greater flexibility and can decide to keep some of the earnings for growth rather than distributing them to investors.
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Potential for long -term capital appreciation. Although Reit primarily provide revenue through dividends, many dividend-paying shares offer both revenue and capital appreciation in the long term. Stocks of established companies that increase dividends over time can provide investors with both growth and revenue.
