Reit taxation | Page 3 | General financial discussion | Discussion forum

rhvic said
Thanks Norman. I checked my spreadsheet, and if I look at one more significant figure in my compound annual return, I too had 0.46% as my rate of return - in agreement with your method exactly (0.455% if you want three significant figures). So my formula appears also to have some validity, as long as cost base is greater than zero.

That's only because the error is small with that one particular set of data. The error will increase should more ROC be received.

For example, if one relabels an additional $1,000 of the same distributions as ROC, then the tax-cost based formula incorrectly gives a higher return of 0.663%. That increase is incorrect. There was no decrease in original amount invested, no increase in any of the distributions received, and no increase in the selling price on December 24!

The formula also does not account for when each distribution occurs. If one adds an extra $1,000 to the 15-Dec-2014 distribution, the IRR becomes 5.261%. The formula returns 4.152%.

topgun said
I found XIRR() function in the last week or so. It works perfectly. It uses the actual transaction date compared to IRR(). I will try uploading a spreadsheet to see if I have a problem. I have never done this.

I get File extension error.
File: Book1.xlsx.

No help for why there is a problem with extension.  

Peter
Why do I have trouble uploading a Excel spreadsheet?

Once again, another April has passed, and a number of so called dividends received over the past year from REITs and ETFs have been redefined as "return of capital" or ROC, by the issuers. For a number of the names I hold, the amounts so redefined have varied from about a third to three quarters of the total annual distributions in 2020. So again, the advertised 'dividend rates' of supposedly say 10% on a REIT are actually much much lower.

I really do not want to invest in these names just so that they can dribble my own money back to me. Yes, the cost base goes down, but that is of no consequence in a registered plan. Perhaps I should dump all of these, and get some bank stocks!

rhvic said
Once again, another April has passed, and a number of so called dividends received over the past year from REITs and ETFs have been redefined as "return of capital" or ROC, by the issuers. For a number of the names I hold, the amounts so redefined have varied from about a third to three quarters of the total annual distributions in 2020. So again, the advertised 'dividend rates' of supposedly say 10% on a REIT are actually much much lower.

I really do not want to invest in these names just so that they can dribble my own money back to me. Yes, the cost base goes down, but that is of no consequence in a registered plan. Perhaps I should dump all of these, and get some bank stocks!  

You don't understand the nature of ROC from REITs then. It is actually 'good' ROC which is nothing more than DD&A (CCA) in real estate investments - a bookkeeping item for depreciation of the building. Good ROC is actually much better than a taxable dividend (in non-reg accounts) because it is treated as tax deferred cap gains far into the future when the REIT is sold. Even in registered accounts, it is part of the cash distribution paid to you. You still get your advertised 10% distribution. What is not to like?

Many of these REITs are the sweetest assets to have, especially in non-registered accounts.

Just because a taxpayer can depreciate a building 4% a year doesn't mean that the building actually loses 4% in value each year. That has been confirmed many times by taxpayers who later sell the building and receive more than even the original, undepreciated cost.

The tax or accounting treatment doesn't always align with the actual economic reality. The rent collected and shielded from income taxes by the depreciation is real money. That money can be used to pay mortgage, utilities, and even the university tuition of the owner's children.

My previous post explains the disconnect with return of capital distributions from a REIT.

First, a correction. My eyesight is not what it once was: the correct value of my current cost base for this ETF is $3829, not 3329.

The current value of the ETF at today's price is $3774. So I am down $55 on that.

Totalling all of the distributions, and adjusting for ROC, I have received $287 in net distributions over 4 years. So my total net 'gain' on the investment is $232, which over the four years works out to about 1.4% on a compound annual basis. Way below the 11% I had hoped for.

There's only so much of the "good" return of capital that is possible each year.

Buildings, for example, can often be depreciated by only up around 4% to 5% each year. Something else will be going on if one is receiving 8% annual distributions and 7% out of the 8% distribution is return of capital for tax purposes.

Your experience is not surprising. Many products marketed for yield are junk and are for the gullible. Such products have "monthly income" or "retirement income" in their marketing.

Some people are unrealistic. Such people may need $1.5 million to retire with interest rates around 1% to 2%. But, they don't have $1.5 million. Instead, they have $700,000. Instead of waiting until they have $1.5 million, they "reach" for a yield of least 4%.

Just by "coincidence", products start popping up that have a targeted payout of 4%. How about that!

Return of capital then happens when the actual returns falls short of the payout.

That's really different from a time when rent was 7% and 3% of the 7% was left after expenses. That 3% could then be shielded from income taxes by depreciation and spent by the real estate investor.