This Tax Season, Keep More of Your Investment Income

This Tax Season, Keep More of Your Investment Income

Remember the old saying, “It’s not what you make, it’s what you keep”? When it comes to building your retirement nest egg, you can keep more of what you earn and reduce your overall tax bill when you invest in real estate investment trusts (REITs).

 

Keep More of Your Cash Flow Annually

Standard investment products that generate monthly income are taxed on the income and/or dividends you earn during the year. Your earnings are drastically reduced every year when taxes are due.

You don’t have to give your money away, however. Investments, like a real estate investment trust (REIT), under normal circumstances, will either drastically reduce your annual tax bill or defer all taxes until you sell your investment.

REITs are given special tax treatment, and as such, can be highly tax efficient. Typically, investors can defer paying taxes until they sell their REIT investment, keeping more money each year to spend or reinvest.

 

Annual Before and After-Tax Cash Flow on a $1,000-a-month Income Stream

Annual Before and After-Tax Cash Flow on a $1,000-a-month Income Stream

• The REIT is assumed to be 100% tax-efficient, and as such, 100% of distributions are classified as Return of Capital (ROC) for tax purposes
 

Pay Lower Taxes Over the Lifetime of Your Investment

Eventually, everyone must pay taxes. Investors, however, will pay fewer taxes when they sell their REIT than the cumulative total of all the annual taxes paid by standard investments.

 

Total Taxes Paid Over a Five-Year Holding Period

Total Taxes Paid Over a Five-Year Holding Period

• The REIT is assumed to be 100% tax-efficient, and as such, 100% of distributions are classified as Return of Capital (ROC) for tax purposes.
 

Invest Less to Generate the Same Cash Flow

Private REITs’ tax efficiency means that investors do not have to tie up as much of their capital to meet their monthly after-tax cash flow needs.

For example, in a perfect world where you could earn a 6% yield on the investment of your choice, you would require significantly more capital to generate the same $1,000-a-month after-tax income stream compared to an investment in a highly tax-efficient REIT. For instance, you would require roughly 42% more capital if you selected an investment vehicle that generated interest income or 26% more capital if you picked a dividend-paying investment.

 

How Much You Need to Invest to Get a $1000-a-Month After-Tax Income Stream

How Much You Need to Invest to Get a $1000-a-Month After-Tax Income Stream

 

We do not live in a perfect world, however, and not all investments provide the same yield potential. If we apply today’s average yields for the investments we have been using, the difference between the amount of capital required to generate the $1,000-monthly after-tax cash flow is significant if not astronomically different between the type of investments.

With interest rates still at historically low levels and dividend stocks being highly volatile and extremely susceptible to capital erosion, a Private REIT is a practical choice if you are looking for a safe, reliable, tax-efficient monthly income.