With the new generation and millennials in line to inherit considerable wealth from the generation born in the 1950s, many will be considering purchasing real estate to provide an additional income.
Investing in a trust fund is another option. Companies setting up these trusts, purchase properties of different nature, for example, residential or commercial, and investors are paid a dividend which is relevant to the success of the purchases. An individual investment could be a private home with the long term plan being to use this as a retirement home.
These amended federal tax regulations for REITs have made it more advantageous than purchasing a property as an individual.
Advantages of investing in a Real Estate Investment Fund (REIT)
The tax laws offer substantial rebates on the income derived from a REIT with 20% rebates for individuals with an income of no more than $157 000 and joint taxation where the income limit is $315 000. For earnings on a higher scale (individuals earning no more than $207 000 and couples no more than $415 000), tax deductions are at a lesser rate.
People investing directly in property is the $10 000 limit on state and local taxes, the greater percentage of which is generated from real estate duties. This restriction has resulted in cutting back of financial gains post taxation. This is particularly relevant to the more expensive properties in more affluent areas.
Another effect of the tax regulation is the reduced amount for the interest generated deductions on a home loan on properties valued at $1million to the new valuation of $750 000. All the new tax regulations benefit those investing in a REIT. The tax benefits to businesses such as REIT are effectively passed on to those who have bought shares in the REIT.
How do REITs trade?
A REIT operates on the same basis as the stock market with their shares fluctuating during trading hours. Popular investment choices for REITs would be condominiums, medical spaces, hotels, retail buildings, manufacturers, online businesses, and buildings that host several servers connected to the internet – more commonly known as server farms.
The purchase of a property by a REIT does not happen without extensive research and scrutiny of market trends. REIT is not limited to only real estate but also the more common stocks and shares. As REITs branch out, they may in the long term, consider online crypto trading and investing in digital crypto exchanges. The Regulation states that 90% or more of the profits of REITs is paid to shareholders by way of tax dividends with the balance being capital gains and not liable to tax.
Individuals investing in property
Purchasing a property as an individual does not come without its disadvantages when the property is bought to provide additional income from rental.
There are additional costs such as maintenance of the property, taxation, and legal fees should evictions be necessary, accountability for possible injury to tenants, and vandalizing of the property. Another disadvantage of purchasing as an individual is the possibility of the property decreasing in value. Because REITs diversify their investments and purchase properties at different times, this does counteract the possibility of losses to investors should the share price fall.