Explain REIT tax handling to me?

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FireAway
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Joined: Mon Jan 29, 2018 2:56 pm

Explain REIT tax handling to me?

Post by FireAway »

So, I have some REITs - including, let's say, "O" (Realty Income), in a taxable account. I'm working on moving these to a deferred account, but I'm confused about how taxes are (have been) handled.

I see a certain portion of the distributions on my 1099-DIV are reported as "Section 199A dividend". Does this mean that 20% of this income is tax-free on my personal income tax? I use H&R Block software for taxes, and I don't see any special handling of this income (other than the entry on the 1099-DIV).

There's a few pennies here and there labeled uncaptured 1250 gain. It seems this should get some special handling too- can I assume H&R block is handling this properly? A small amount is labeled LTCG. I haven't done the math, but I have no reason to believe H&R B is not handling this correctly as LTCG.

A good chunk of the distribution is labeled "Nondividend distribution", I believe this is 'return of capital', and should not be taxed. If I understand correctly, the 'return of capital' amount lowers my basis, so I need to pay CG tax when I sell. But how is the accounting done for this? TD Ameritrade seems to show my basis in the stock as being simply what I paid for it. Was I supposed to have been keeping track of these distributions for all these years, so that I can lower the basis when I sell?
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One Ping
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Re: Explain REIT tax handling to me?

Post by One Ping »

Bump ... seems like this deserves a reply.
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retired@50
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Re: Explain REIT tax handling to me?

Post by retired@50 »

I think this winds up on IRS Form 8995.

I held a REIT index fund in the past, but it was inside my Roth IRA, so it never appeared on my taxes.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
FireAway
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Joined: Mon Jan 29, 2018 2:56 pm

Re: Explain REIT tax handling to me?

Post by FireAway »

OK, so in looking at my tax return, I see that I did file 8995, but apparently passs-through REIT deduction has a lot of limitations, including a limit of (taxable income - cap gains income). Since much of my income in 2020 was cap gains, (taxable - cap gains) was negative, so any 199A deduction was disallowed. That answers one question.

The other big one, since I'm planning to sell some REIT soon and need to limit cap gains, is the question on cap gains accounting. If I'm selling some REIT I've held for 10 years, do I need to go back and add up all the "nondividend distributions", and subtract that from my basis? I guess that's doable, but I'm surprised the brokerage doesn't automatically build that into its basis calculation.
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retired@50
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Re: Explain REIT tax handling to me?

Post by retired@50 »

FireAway wrote: Sun Sep 19, 2021 6:46 pm OK, so in looking at my tax return, I see that I did file 8995, but apparently passs-through REIT deduction has a lot of limitations, including a limit of (taxable income - cap gains income). Since much of my income in 2020 was cap gains, (taxable - cap gains) was negative, so any 199A deduction was disallowed. That answers one question.

The other big one, since I'm planning to sell some REIT soon and need to limit cap gains, is the question on cap gains accounting. If I'm selling some REIT I've held for 10 years, do I need to go back and add up all the "nondividend distributions", and subtract that from my basis? I guess that's doable, but I'm surprised the brokerage doesn't automatically build that into its basis calculation.
See links:
Check out the dividend composition section in this page;
https://www.bogleheads.org/wiki/Real_es ... ment_trust

Then, check out footnote 10 in the page above, which will lead to this page;
https://www.bogleheads.org/wiki/Vanguar ... tributions

Not sure if the above will fully answer your question or not, as I have no experience with REITs in a taxable account.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
rossington
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Re: Explain REIT tax handling to me?

Post by rossington »

FireAway wrote: Sun Sep 19, 2021 6:46 pm The other big one, since I'm planning to sell some REIT soon and need to limit cap gains, is the question on cap gains accounting. If I'm selling some REIT I've held for 10 years, do I need to go back and add up all the "nondividend distributions", and subtract that from my basis?
Yes...
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.
Topic Author
FireAway
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Joined: Mon Jan 29, 2018 2:56 pm

Re: Explain REIT tax handling to me?

Post by FireAway »

Thanks, all. It's one thing to know the rules/regs, but it's always nice to have someone confirm them.
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FireAway
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Re: Explain REIT tax handling to me?

Post by FireAway »

And, my last post here: After looking up all the numbers I needed and doing the math, it appears as though TDA actually IS taking into account the capital return when it does the basis calculation, so I should be able to use the TDA reported cap gain and not have to do all the rsearch/math.
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