In some cases, tax treatment can improve after-tax outcomes for real estate investments compared with fully taxable income sources such as high-yield savings accounts. But those outcomes depend on the structure of the investment, the type of income received, and each investor’s individual tax situation.
Here’s a closer look at how post-tax yield can help investors evaluate income-producing investments more clearly.
Why post-tax yields matter
The tax advantages of REITs
Some benefits that come from investing in REIT-qualified offerings include:
Passthrough income
REIT structures can avoid entity-level corporate income tax if applicable REIT requirements are met, potentially reducing the double taxation associated with traditional corporate structures.
199A QBI Deduction
Certain qualified REIT dividends may qualify for the Section 199A deduction, which can allow eligible investors to deduct up to 20% of that qualified REIT dividend income, subject to applicable rules and limitations.
For example, an eligible investor in the 25% federal tax bracket could see an advertised yield of 8.1%¹ effectively increase to a tax-equivalent yield of approximately 8.65% when factoring in the Section 199A deduction.
Depreciation benefits
Real estate investments also allow for depreciation deductions, reducing taxable income even as properties generate cash flow. This tax deferral can significantly enhance cash-on-cash returns and improve long-term performance.
Comparing post-tax yields to other investments
High-yield savings accounts
Fully taxable at ordinary income rates, these accounts yield far less after taxes. For an investor in the 25% federal tax bracket, a 4.75% yield becomes just 3.56% post-tax.
Private credit funds
Investments in Arrived’s Private Credit Fund with an advertised 8.1% historic annualized yield¹ and the 199A deduction result in a post-tax yield of 6.48%. That’s nearly double the post-tax yield of a high-yield savings account, offering a compelling case for these tax-efficient investments.
Why timing matters
The 199A deduction expires in 2025
The Section 199A deduction remains available under current law.
Certain qualified REIT dividends may still qualify for the Section 199A deduction under current IRS guidance. Because tax law can change, investors should consult a qualified tax advisor about how current rules apply to their situation.
Tax considerations matter year-round
Taxes can influence what investors ultimately keep from an investment, which is why post-tax yield can be a useful lens when comparing opportunities throughout the year.
Market comparisons are favorable
When considering tax implications, private credit and real estate investments can offer advantages compared to other investments. While traditional savings options are fully taxable, investments in private credit and real estate structured as REITs benefit from favorable tax treatment that can impact the bottom line. These potential tax efficiencies and competitive yields can make them an attractive option for certain investors. As with any investment, individual circumstances vary, and investors should consult a tax or financial advisor to evaluate the best options for their goals.
