tailieunhanh - INVESTING IN REITs PART 7

Appendix | RESOURCES Appendix A Death and Taxes 322 Appendix B REITs and Their Market Caps 326 Appendix C Determining REIT AFFOs 332 Appendix D Cost of Equity Capital 33 5 Appendix E REIT Portfolio Management 338 Glossary 346 322 APPENDIX A APPENDIX A DEATH AND TAXES When they re not held in individual retirement accounts IRAs or other tax-advantaged accounts such as 401 k plans REITs have two significant disadvantages with respect to their common stock counterparts. More than 75 percent of the total returns expected by holders of most non-REIT common stocks consists of capital appreciation today s dividend yields are skimpy averaging approximately 2 percent for the average large-cap stock. If a stock is held for more than twelve months the capital appreciation is taxed at a maximum tax rate of only 15 percent or even 5 percent for low-bracket taxpayers. Furthermore non-REIT dividends are now taxed at a rate not to exceed 15 percent. With REITs however as much as 50-65 percent of the expected total return will come from dividend income not only does less of the return come from capital gains but REITs dividends are taxed at ordinary income rates. Nevertheless ownership of REIT shares does frequently provide the shareholder with some definite tax advantages certainly vis-à-vis most preferred shares all REIT preferreds and all bonds. Very often a significant portion of the dividends received from a REIT is not fully taxable as ordinary income some portion of the dividend may be treated as a long-term capital gain and another portion may be treated as a return of capital which is not currently taxable to the shareholder. This return-of-capital portion of the dividend reduces the shareholder s cost basis in the shares and defers the tax until the shares are ultimately sold assuming the sale is made at a price that exceeds the cost basis . However if held for at least twelve months the gain is then taxed at long-term capital gain rates and the shareholder has in effect converted .