Did You Know Real Estate Funds Get This Powerful Tax Break?

You don’t have to be a millionaire to invest in real estate. You can own a broadly diversified portfolio of real estate properties by investing in low-cost real estate mutual or exchange-traded funds.

This tax loophole really slipped under the radar, so don’t feel bad if you missed it.

Earlier this year, the IRS clarified the rules for a special tax break available to investors in real estate under the Tax Cuts and Jobs Act of 2017.

Here’s the good part. You don’t have to own an entire building, or be a real estate tycoon, to qualify for this tax loophole, which gives you a 20% tax break on Qualified Business Income (QBI).

Let’s break it down.

Who gets it?

This deduction is available to all shareholders of real estate mutual funds, exchange-traded funds and REITs.

It gives you a 20% tax break on dividend income distributed from the fund and is available regardless of your income level, your professional status, or whether you itemize or take the standard deduction. You don’t need to do anything special to get the deduction; the savings will be reflected directly on your 1099 tax reporting forms.

How come no one knows about it?

This 20% deduction rolled out earlier with the Tax Cuts and Jobs Act of 2017. But many people were barred from using it, because they made too much money, or were in professions that didn’t qualify.

It wasn’t until January 2019 that the IRS published new guidance saying that ordinary people who invest in real estate mutual funds, exchange-traded funds and REITs could take advantage of this nifty new 20% tax discount. That’s why these companies had to scramble and issue corrected 1099 tax forms in early 2019 to advise you of the tax savings (sorry!).

Why invest in real estate anyway?

Many investors are familiar with REITs, or Real Estate Investment Trusts.

REITs are investment vehicles that own a portfolio of real estate properties, often ranging from hotels and self-storage units, to data centers, apartments, and senior living facilities.

These investments are in turn frequently bundled up inside mutual funds or exchange-traded funds so individual investors, like you, can buy directly into a broadly diversified portfolio of real estate assets.

What’s the attraction of these funds? They provide an easy way for investors to gain low-cost exposure to the commercial real estate market and still obtain excellent diversification, tax-efficiency, high potential income and liquidity.

Instead of buying one, big expensive real estate property (assuming you even have enough money to do so), you can own a diverse, curated selection of professionally managed real estate properties located across the country, all at low-cost and with absolutely no hassle.

Unlike traditional real estate ownership, where it may take months and a hefty realtor commission to buy or sell a property, real estate mutual and exchange-traded funds are easily bought and sold, often for no fee, with the proceeds available to you within a day or two.

And to make it even better ….

To seal the deal, dividend income paid out from your real estate funds now gets an unbeatable 20% tax break.

And just to show that real estate is no slouch when it comes to investment performance, understand that real estate investments have turned in a stellar 20-year performance record, despite the 2008 financial crisis and real estate meltdown. So stellar, in fact, that they’ve actually eclipsed returns from the S&P 500 index.

Returns going forward are, of course, entirely unpredictable, but the point remains that real estate funds and ETFs are investments you should normally consider for at least a small slice of your portfolio thanks to their income and diversification potential, and now for their enhanced tax advantages.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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