What Biden's Proposal Means for REIT Investors
We think the proposed elimination of the 1031 exchange will have limited impact on U.S. REITs.
While the Biden administration's proposed elimination of the 1031 exchange to raise tax revenue to fund the American Families Plan has caused concern among many real estate investors, we believe that the impact to U.S. REITs will be very limited. Over the past several years, REITs have disposed of tens of billions in assets each quarter and yet only rarely used a 1031 exchange to avoid capital gains taxes. If REITs pay out 90% of taxable income as dividends to shareholders, they avoid paying any corporate taxes. As a pass-through investment vehicle, the dividends paid by REITs are not considered qualified income like dividends paid by most other companies and thus are usually taxed at the highest tax bracket for each shareholder. However, part of the dividend can be reclassified as capital gains and thus taxed at a significantly lower level. Therefore, if the REIT recognizes capital gains on dispositions, the taxes owed by the shareholder on the dividend payment received from the REIT falls.
This means it is to the shareholder's advantage that the REIT regularly disposes of assets and records capital gains. Thus, REITs tend to only use the 1031 exchange when dispositions in a given year are so high that the capital gains recorded exceed the amount of the dividend payment that can be converted from ordinary income to capital gains income. We believe that the elimination would therefore have a very small impact on the few times when disposition activity is extremely high and can easily be avoided by strategic management decisions. If the 1031 exchange is eliminated and the market negatively reacts to the news, we believe this could be a good entry point for investors looking for a position in the real estate sector.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.