REITS in Taxable Brokerage Accounts: Good or Bad

[stewardinlife]

(07-10-2015, 01:13 PM)Kerim Wrote: Ok, thanks.

If the choice is whether to hold REITs at all in your taxable account, since tax-deferred is not an option, then you need to compare it to alternative investment options, taking tax considerations into account. People prefer to have their REITs in the tax-deferred accounts because (generally) REIT distributions are taxed at your normal income rate, rather than at the lower rate that applies (generally) to dividends from non-REITs. This dynamic is exacerbated by the generally higher yields that REITs provide.

So to answer your question more directly, you need to decide how the REITs are going to fit into your portfolio. From a tax-adjusted income standpoint, you'll generally do better in shares of T than in a REIT paying 5.4 percent, simply because you'll lose more of the latter's income to taxes. But if you're comparing a REIT paying 5.4 percent to a stock paying 3.5 percent, you'll have to do some math based on your particular tax rate to see which way you come out better.

BUT, all that said, in my humble opinion, you should not be put off from holding REITs in a taxable account just because the tax treatment is not as favorable as for other dividends. Current income and tax treatment are usually not the end of the inquiry. For example, you may believe that some REITs are well-priced right now, giving you a better prospect of capital appreciation than other alternatives.

At bottom, if you believe that you want REITs to play a role in your well-constructed and well-diversified portfolio, and your only option is to hold them in a taxable account, then go right ahead. Consider the extra tax you pay on them as your "success tax" for putting together such a nice portfolio.

Kerim,

Thanks for taking the time to explain. When you say "shares of T" are you meaning AT&T stock, or a class of shares -- Sorry to ask this noob question.

Also, I just finished talking to Vanguard, where I have my Roth IRA -- They said I can open an Roth IRA brokerage acct. where I can buy any share and I thing they charge around $8 for a transaction. Would this be a better alternative?

Thanks again.