Why REIT Investors Aren't Sweating The FIscal Cliff

The really bizarre thing about the fiscal cliff? It appears to benefit real estate investment trusts (REIT).

The special dividend tax rate will disappear if the fiscal cliff happens. That means that taxes on qualified dividends will increase from 15% to 43.8% if the fiscal cliff happens, whereas capital gains will be taxed at 23.8%. For this reason, many dividend-paying stocks will become tax disadvantaged.

Treated As 'Ordinary Income'
REITs, on the other hand, are taxed a bit differently. REITs pay large dividends, but they are exempt from corporate taxes. As a result of this, their dividends get taxed as ordinary income, rather than under the special dividend-tax rate. The top ordinary income tax rate will also increase, but only from 35% to 39.6%; a much smaller increase than the one for qualified dividends.

As a result, it would appear that some dividend investors have started shifting toward REITs and exiting other dividend-paying stocks, such as utilities.

If you don’t get it, don't sweat it. Just remember that as long as our tax code is ridiculously complex, only about 2% of the population will actually understand it.

Which is why as a nation we incur $435 billion in tax compliance costs every year (equal to about 3% of our economy). Talk about inefficiency! We could actually help solve some of our deficit woes merely by simplifying the tax code and freeing up some of that $435 billion for investment. Which is, by the way, one of the recommendations of the Simpson-Bowles Commission that has largely been ignored.