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  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    rlp2451 - This is a great question, and one that has puzzled me. I know the REITs/mREITs issue 1099-DIV, and not a K-1, but I also know that mREITs can generate UBTI. Quite the conundrum. The IRS publication that discusses UBTI/UBIT in general is silent on this issue, and I can't seem to find any information on the topic elsewhere. My guess would be that the individual mREIT would notify investors when it made distributions that partially constitute UBTI, but perhaps a poster who actually paid UBIT on a mREIT in the past--such as mreits4ever, who states as much above--could weigh in on the topic.
    Mar 8 05:29 PM | Likes Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    Thanks jaymarx, and you're more than welcome!
    Mar 8 04:14 PM | 1 Like Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    Great clarification gman1253, and on-point. This is the issue I was trying to get at when I mentioned spreading UBTI-producing assets across tax-advantaged accounts. Granted, though, whether the added burden of doing so is merited depends on how much unrelated business income tax the assets are expected to generate...
    Mar 8 12:16 PM | 1 Like Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    Hey Larry. The UBTI/UBIT issue crops up in tax-advantaged accounts, which includes a Roth IRA. As other posters have mentioned, the likelihood of you paying the tax turns on various factors, such as your position size, the UBTI generated, and the number of UBTI-producing assets held in the account. With that said, there may or may not be reason to worry; even if the tax is triggered, it might be a negligible amount depending on the assets you hold in that account. I hope this helps.

    TC
    Mar 8 12:14 PM | 1 Like Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    Yikes, apologies for the typo here -- in this instance, it should be UBTI rather than UBIT, since it's the income generated rather than the tax that determines which tax bracket's triggered.
    Mar 8 11:03 AM | Likes Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    Thanks bionic1, but I intentionally used UBIT -- I was referring to the the IRA producing unrelated business income tax (UBIT), which stems from unrelated business taxable income (UBTI).
    Mar 8 10:54 AM | 1 Like Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    I would tend to agree. If it helps to put this in context, the tax consequences for UBIT held in an IRA follow a progressive tax-rate structure, depending on the amount of UBIT:

    UBIT < $1,500: 15%
    >$1,500 but <$3,500: $225, plus 28% of the excess over $1,500.
    >$3,500 but <$5,500: $785, plus 31% of the excess over $3,500.
    >$5,500 but <$7,500: $1,405, plus 36% of the excess over $5,500
    >$7,500: $2,125, plus 39.6% of the excess over $7,500

    See I.R.C. 511 and 1(e) (note that IRAs treated under trust tax rates).
    Mar 8 10:49 AM | 1 Like Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    Hey Patrick. Thanks for the added information. From what I understand, even if the assets exist in a REIT subsidiary, UBIT may still be triggered in some instances (for example, if the subsidiary is a disregarded entity for tax purposes). And other mortgage REITs continue to list UBIT in the risk disclosure portions of their SEC filings, which suggests to me, at least, that they still consider UBIT to be a potential risk. Honestly, this may be due to the nightmarishly-complex nature of the tax code on this topic, and the REITs ensuring that all of their bases are covered.
    Mar 8 10:19 AM | Likes Like |Link to Comment
  • Double-Digit Yields. Be Sure You Get The mREIT Facts Before You Leap [View article]
    Richard. Interesting read. I totally agree that looking beyond the yields is necessary with REITs (and with other investments). An added risk with mortgage REITs is the possibility of their producing UBIT when held in an IRA or other tax-advantaged account...
    Mar 8 12:35 AM | Likes Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    haha that's one way to do it, hectorsector.
    Mar 8 12:19 AM | 1 Like Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    Thanks Chris!! I'm glad you found it informative.
    Mar 8 12:12 AM | Likes Like |Link to Comment
  • Tax Bomb: Mortgage REITs Triggering UBIT [View article]
    That link barely discusses this topic, other than merely noting that REITs can "sometimes" generate UBIT and that the issue is "complex." Both true, but not super helpful!
    Mar 8 12:11 AM | 2 Likes Like |Link to Comment
  • Understanding The Taxation Of REIT Distributions [View article]
    Hey AFAHM. Good question. The tax inefficiency of REITs stems from the taxation of the distributions: namely, that a large portion of the distributions are taxed at ordinary income rates. The fact that the REIT is never sold doesn't affect this calculus much. As you hold the REIT, the REIT spits out quarterly distributions, and you are taxed on those distributions. Now, in reality, the tax inefficiency of REITs is dampened for a retired individual (assuming he's in a lower marginal tax bracket). Even though portions of the distributions are taxed at his ordinary income rates, then---assuming his ordinary income rate isn't that high--he doesn't suffer much tax-wise. This makes sense, even though the REIT is still inefficient from a tax standpoint. When an asset is tax inefficient, it's normally the high-bracket tax payers who suffer most from the inefficiency.

    I'm not sure why you quote the section relating to the return of capital component of the distributions. But I should mention that the zero-basis problem shouldn't theoretically happen with REITs too much. Frankly, I would be surprised if unit holders in REITs received such large return of capital distributions that their bases were reduced to zero, and they began being taxed on the additional return of capital portions that the REIT distributed. I would imagine that a unit holder would jump ship before that happened.

    I hope this helps!
    Mar 1 07:08 PM | Likes Like |Link to Comment
  • Understanding The Taxation Of REIT Distributions [View article]
    Great additional points Bruce. Thanks.
    Mar 1 06:50 PM | Likes Like |Link to Comment
  • Understanding The Taxation Of REIT Distributions [View article]
    Yes, mgordon10, Form 1099-DIV breaks down the distributions for you. Box 2a, for example, specifies the amount that will receive long-term capital gain treatment, Box 2b specifies amounts that constitute unrecaptured Section 1250 gain (which may arise when the REIT sells depreciable real estate), etc.
    Feb 28 11:44 PM | Likes Like |Link to Comment
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