The Potential Tax Benefits of Investing in Private REITs

Published On: October 28, 2024Categories: Insights

In real estate investing, maximizing returns and minimizing taxes are among the most important considerations. Taxes are an ever-present cost that can quickly eat into profits and reduce overall gains, especially when investing outside registered accounts. Investors who own or manage properties themselves are typically most concerned about income or capital gains taxes. 

 However, taxes apply differently to various types of real estate investments. Private REITs offer tax advantages, making them attractive for portfolios and effective for long-term wealth building. Let’s dive deeper into how private REITs work, why they can be a tax-efficient investment, and how Equiton’s products leverage these benefits. 

What Are Private REITs?

A REIT lets individuals invest in portfolios of real estate assets. These include apartments, commercial properties, and developments. It eliminates the physical and time demands of owning and managing properties. One way private REITs differ from publicly traded REITs in that they are not listed on the stock exchange.  

 Private REITs raise capital from investors to buy or finance real estate. These properties generate profits through monthly rent payments from residents. Equity grows as mortgages are paid down. Property values are also appreciated as buildings are improved.  

A hidden benefit of private REITs is the favourable tax treatment of these returns. 

The Impact of Capital Gains Tax

Let’s explore the tax efficiency of capital gains versus regular income tax. When you own a property and collect rental income directly, you are taxed on that income. It is taxed as regular income, often at a higher tax rate. However, capital gains tax, applied when you sell a private REIT, is generally more favorable. 

Individuals include 50% of capital gains in their taxable income, meaning only half of the gain (up to $250,000) is taxed. Any gains above $250,000 are subject to a 67.7% inclusion rate. If an investor sells a private REIT and realizes a $100,000 gain, they only pay taxes on $50,000 at their marginal tax rate. In contrast, rental income from personally owning an investment property is fully included in taxable income. 

Private REITs offer an advantage by treating gains from selling REIT units as capital gains. This is different from regular income. It can make REITs a more tax-efficient option compared to rental income. This makes private REITs appealing for investors. They help reduce tax impact while growing wealth through real estate investments. 

Liquidity and Flexibility

When you own and manage physical property yourself, realizing profits typically requires selling the entire asset, which can limit your flexibility. In contrast, investing in REITs allows for more strategic decision-making, as you can choose to sell portions of your shares over time. This can help manage capital gains taxes while still keeping a portion of your investment for future growth. 

Income Treatment and Long-Term Growth

When you buy an investment property, you pay taxes on the rent you collect each month, annually. This is like your employment income. With some REITs, such as the Equiton Real Estate Investment Fund Trust (The Apartment Fund), the returns are classified as a return of capital. This defers taxes until you sell your shares. This allows you to reinvest those returns and benefit from compounded growth over time. It’s a great way to build wealth more efficiently. 

Use Your Registered Accounts

You can invest in our products using registered accounts like your RRSP, TFSA, RESP, LIRA, LIF or RRIF. This allows you to further enhance your tax efficiency. 

Building Wealth Through Smart Tax Strategies

Investing in private REITs offers a host of benefits: diversification, professional management, and a passive income stream. But one of the most compelling advantages is the ability to defer and mitigate the impact of taxes.  

Partnering with Equiton gives you access to a suite of investment products. These products can grow your wealth. They also help you strategically protect your hard-earned profits from excessive taxation. As you explore your investment options, consider the long-term advantages of private REITs. 

Let Equiton help you build a brighter financial future through our expertly managed real estate investment products. Talk to an investment specialist today: inquiries@equiton.com  

 

Explore our investment solutions that offer tax advantages and help you maximize your returns. Discover more below! 

Apartment Fund: 

Our Apartment Fund specializes in acquiring underperforming and undervalued multi-residential properties and select new developments in Canada and increasing value through active management. Investors in the Fund receive the yield from rental income and participate in the growth of the underlying properties. Targeted Annual Net Return of 8%‑12%. 

Click here to learn more. 

Income and Development Fund: 

Our Income and Development Fund provides access to a diversified portfolio of institutional grade real estate assets including income-producing (commercial/industrial/lending) as well as development projects. Investors receive cash flow from rental income and interest from loans, capital appreciation from growth of value of properties and special distributions from development projects. Targeted Annual Net Return of 12%‑16% (over 10-year period). 

Click here to learn more.