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02 June 2003 Whilst many investors will soon be enjoying larger dividend payouts as a result of the recent tax cuts, those who have invested in Real Estate Investment Trusts (REITs) will not be so fortunate. |
The reason for this is that REITs were excluded from the $350 billion tax cut package recently signed by President Bush. This is because unlike ordinary companies who issue shares, they have not already paid corporate tax and instead are required to pay 90% of their taxable income in dividends. Therefore, REITs are not subject to the 'double taxation' that the tax cut plan was geared to eliminating, or at least reducing.
Nevertheless, investors in REITs will receive a small amount of relief in the form of a reduction in the maximum rate of income tax from 38.6% to 35%, provided for in the recent tax package.
However, in certain instances, REITs will still qualify for the reduced dividend tax rate of 15%, for example, if dividends are paid out via a corporation or subsidiary which already pays corporate tax. Additionally, dividends paid as part of a capital gains payment will also be taxed at the 15% rate that applies to standard shares, and lower income groups may also qualify for a reduced tax rate.
Opinion is divided amongst experts as to whether this differential tax treatment will have a negative impact on REITS. Some say that it will inevitably lead to a decrease in popularity of real estate shares, but others have observed that the wider effect of the stimulus package will offset any negative side effects.
As of the end of April this year, the average REIT share had a yield of 6.75%, compared to a 1.8% yield for S&P 500 stocks, according to the Washington Times. Although many analysts feel that this gap will now begin to close, the National Association of Real Estate Executives recently predicted that REITs will continue to produce higher yields than stocks.
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