REITs and Taxes: The Qualified Business Income Deduction

With the QBI deduction you can save 20% on your taxable income through REIT investments.

Real Estate Investment Trusts (REITs) were created in 1960 to make it easy and tax efficient for people to invest in real estate. Then the 2017 Tax Cuts and Jobs Act (TCJA) supercharged the power of REITs to make tax efficient investments. 

Part of the TCJA gives a special tax break to owners of passthrough entities. This new tax cut is called the Qualified Business Income deduction. It helps small business owners keep more of their earnings so they can reinvest it into their business and the economy. REITs are passthrough businesses so they qualify for this special deduction. 

The Qualified Business Income deduction is huge. It allows business owners to deduct 20% of their income! This has the effect of only being taxed on 80% of your qualifying REIT income. 

Who Qualifies for QBI Deduction?

Not every company qualifies for the Qualified Business Income (QBI) deduction. To start, the company has to be a passthrough entity. That means that corporations and public companies don’t count. 

Even then, not all passthrough entities can qualify. Companies deemed to be a “specified service trade or business” don’t qualify. This category usually includes businesses like doctors, dentists, or lawyers. The common trait is that their biggest asset is the reputation and skill of their owners or employees. 

Arrived, like other REITs, qualify as a passthrough entity. REITs pass all the necessary tests and qualify for this deduction.  

By extension, that means that by investing in REITs like Arrived, investors own a piece of the business and qualify for this awesome tax treatment. 

What Income Qualifies?

Not all income is created equally. To qualify for the QBI deduction, earnings need to be “qualified”. Fortunately, most regular REIT dividends qualify for this deduction. That means the income REITs produce by renting properties will qualify for the 20% deduction. 

Capital gains do not qualify for the QBI deduction. This is okay, because capital gains are already taxed at significantly lower rates than regular dividends. Plus, the only capital gain will be when Arrived sells the property several years in the future. 

An Example: The QBI Deduction in Practice

Let’s assume that someone earns $1,000 in qualifying dividends from their investment in Arrived and $1,000 extra from their job. Assume that this person is in the 24% tax bracket. 

The extra $1,000 of income from the job is taxed at the ordinary rates. They’d pay an additional $240 of income taxes for the $1,000 that earned (24% * 1,000 = $240). 

After paying your taxes, this person is left with $760 from the $1,000 of income. 

The dividend income is treated differently. They get to deduct 20% of the income before calculating the taxes you’ll owe. So for the $1,000 of Arrived dividends, the investor immediately deducts 20%. The 20% deducted from the dividends means a taxable income of $800. ($1,000 – $200). 

Now this person pays 24% income tax on $800 of income, which is $192. ($800 * 24%). After paying the taxes, they’re left with $808 ($1,000 – $192 = $808). 

Overall, this person pays 24% of their income from their job in taxes ($240/$1,000) but only 19.2% of their Arrived income ($192/$1,000 = 19.2%)! 

The QBI deduction effectively lowers your tax rate by 20% for your REIT dividends. Our example investor pays 19.2% on their REIT income but 24% on the income from their job. 

This makes a huge difference! REITs, as passthrough entities, qualify for the Qualified Business Income deduction and pass huge tax savings on to their investors. 

Arrived and the QBI Deduction

Would you rather pay more in taxes or less in taxes? 

The QBI deduction is a great way to keep more money in your pocket. When combined with the way REITs only pay single taxation, it’s clear that investing in real estate has some serious tax benefits to investing in stocks. 

Most taxpayers don’t qualify for the Qualified Business Income deduction. To use it, you need to earn income from passthrough entities that earn their income in a specific way. Arrived qualifies for this and is opening the opportunity up to investors for a minimum of just $100. 

For the first time ever, investors can easily invest in rental properties and take advantage of the same tax cuts that wealthy people use. This democratization of real estate and investing is only possible now with Arrived. 

Limitations to QBI Deductions

This is a simplified version of how the Qualified Business Income deduction works specific to REITs and Arrived. There are potential limitations for an individual’s ability to use the deduction. 

These limits are relevant when an individual has other qualifying income and is specific to complex tax situations. As with any tax situation, there are always exceptions and special circumstances. Please consult your tax advisor for advice specific to your personal situation. 

Sign up today to Arrived Homes to start investing in rental properties and start saving on taxes through QBI deductions like a pro.