The Potential Tax Benefits of Investing in Private REITs

Published On: October 28, 2024Categories: Insights

When it comes to real estate investing, one of the most significant factors to consider is maximizing returns while minimizing the tax burden. Taxes are an ever-present cost that can quickly eat into profits and reduce overall gains, especially outside registered accounts. Investors who own or manage properties themselves are typically most concerned about income or capital gains taxes.

However, not all real estate investments are treated the same when it comes to taxes. For example, private real estate investment trusts (REITs) offer tax advantages that make them an attractive addition to an investor’s portfolio and a powerful tool 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 allows individuals to invest in portfolios of real estate assets, like apartment buildings, commercial properties, and development projects without the physical and time demands of owning and managing the properties themselves. 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. The profits from these properties are generated through monthly rent payments from residents, the equity that builds from paying down the mortgages, and the property value appreciation as improvements are made to the buildings. One of the hidden benefits of private REITs is how these returns can be treated from a tax perspective.

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, that income is typically taxed as regular income, which can be at a higher tax rate. However, capital gains tax, applied when you sell a private REIT, is generally more favorable.

For individuals, capital gains are subject to a 50% inclusion rate, meaning only half of the gain (up to $250,000) is added to taxable income. Any gains above $250,000 are subject to a 67.7% inclusion rate. So, if an investor realizes a $100,000 gain by selling a private REIT, only $50,000 would be taxed at their marginal tax rate. This differs significantly from the rental income that comes from owning an investment property yourself, which is fully included in taxable income.

Private REITs offer an added advantage because, unlike rental income, gains from selling REIT units are treated as capital gains rather than regular income, often resulting in a more tax-efficient outcome. This makes private REITs an appealing option for investors looking to reduce tax impact while growing their 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 yourself, the rent you collect monthly is taxed every year just like your employment income. With some REITs, like the Equiton Real Estate Investment Fund Trust (The Apartment Fund), the returns are treated as a return of capital, which is not taxable 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, allowing 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, particularly for investors focused on maximizing after-tax returns, is the ability to defer and mitigate the impact of taxes.

By partnering with Equiton, you gain access to a suite of investment products that have the potential to grow your wealth while offering you the ability to be strategic in protecting your hard-earned profits from being diminished by taxes. 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