How income tax rules help REIT investors earn more in long term

Real Estate Investment Trust (REIT) is a realty investment without owning the property. In comparison to direct real estate investment, here one can start investment with low amount and can buy or sell any time as liquidity is quite high in comparison to direct real estate investment. In REITs, an investor has an opportunity to invest in direct equity or in non-equity REITs. However, if we go by the income tax norms, an investor investing in REITs keeping long-term time horizon, he or she would be able to get indexation benefit, which is not available in direct real estate investment.

Speaking on how long-term investment in REITs help an investor earn more; Pankaj Mathpal, Founder & CEO at Optima Money Managers said, “REIT investment is comparatively better than direct real estate investment as it gives more liquidity to an investor. Apart from this, if invested in REIT shares, then there is indexation benefit to the investor on long-term investments, which is not available in direct real estate investment. In long-term REIT investment, appreciation of cost is applied on one’s income and hence the net income tax outgo becomes lesser while in real estate one’s income is just the difference between one’s properties buy or sell price.”

Highlighting the income tax benefit on long-term REIT investment; Vishal Wagh, Research Head at Bonanza Portfolio said, “The interest and dividends received by the REIT from the SPVs are exempt from tax. The REIT is also exempt from tax on its rental income, which it may have earned if it owned property directly. Rental income of the REIT is exempt in its hands, but taxable in the hands of the investors. With appreciated stock, you can sell your shares over a number of years to spread out the capital gains. Unfortunately, investment in real estate is not granted the same luxury; the entire gain amount must be claimed on your taxes in the year the property is sold.”

Asked about income tax benefit on dividends and interest earned; Amit Gupta, MD at SAG Infotech said, “It is to be noted that the tax applicability to the REIT investor is only concerned with the cash flow part, which is also the income from interest of the REIT by the SPVs (SPVs exempted from that too) and the income from rent of REIT (exempted for the REIT). If anyway, the SPVs opts for discounted rate on income tax, the tax applicable on the cash flow dividends and rest all the cash flow received is entitled to be tax exempted. This is a significant advantage of a REIT as compared to a normal company structure, where the company pays tax on its profits, and the shareholders are subjected to tax on the dividends, irrespective of the rate of tax paid by the company. A REIT can, therefore, effectively give investors a higher post-tax return, as compared to a normal company structure.”

Speaking on how income tax rule is applied on REIT investment; Vishal Wagh of Bonanza Portfolio said, “As REITs are listed, in case an investor sells it before 3 years, the gains will be considered as short-term and will be taxed at 15 per cent, while long-term gains (after 3 years) above 1 lakh will be taxed at the rate of 10 per cent (without indexation).”

However, Pankaj Mathpal of Optima Money Managers said that in long term REIT investment, an investor has an option to choose indexation benefit paying 20 per cent on the net income after deducting appreciation in cost over the period of time. Mathpal also said that REITs are bound to pay 90 per cent their rental income as dividend to the REIT investors.

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