REIT's (Real Estate Investment Trusts) are a type of investment traded on the stock market. It is important to know that investing in them is not the same as investing in common stock. Because of this, there are special tax issues you have to handle in bivio at tax time.
To keep your club record keeping as simple as possible, we recommend against investing in REIT's in your club. This advice has been proven correct over and over when clubs ignore it, invest in REIT's and get into complex accounting issues they are uncomfortable handling.
Here are some of the issues that arise and cause extra work and complications for club treasurers:
- Dividend Reclassification
REIT distributions get reclassified after the end of the year into 3 or 4 different categories. You won't know what those are until you get your 1099. They require manual adjustments to each dividend entry that was made during the year in order to prepare your club taxes correctly.
It is not hard to make these changes, but it makes interpreting the information on your 1099 forms more complicated. Some brokers do not break down the reclassification by dividend received on 1099's so you need to find the information from the REIT website and make additional calculations to make your adjustments correctly.
- Delays In Preparing Your Club Taxes
REIT's have to close out their own tax years before they can determine the dividend reclassification amounts. This means, at best, that your 1099 forms will probably not be available before the middle of February. Some brokers delay them even longer.
Reclassification information is sometimes available on REIT websites, but in our experience, many club treasurers find it difficult to get or use it from that source.
- Incorrect or Missed Cost Basis Adjustments
Some REIT's don't have a calendar based tax year. That means that reclassification information is not available until later in the year when they close your books. They will then send out amended 1099 forms. If the changes are significant, you'll need to file amended club tax forms and distribute amended K-1's to your members. If you miss making these adjustments you will have problems down the road when you sell the REIT's.
The problems come because some of the adjustments can impact the cost basis of your REIT shares. If you don't make them, when you sell the REIT, you will have trouble matching your 1099 capital gains and losses. The more time that has passed and the more adjustments you have missed, the more complicated it will be to try and get things corrected.
- More Complicated Reporting Adjustments
REIT's by law are supposed to pass through all of their capital gains. If, for some reason, after they close their books, they haven't done this, they may later revise their distribution information and issue a form 2439 requiring more complicated accounting adjustments at some point later in the year. Fortunately this happens rarely but it does happen.
- DRIP Investing in REIT's
IF your club does automatic dividend reinvesting in your REIT shares, you cannot use the single DRIP entry form to make purchase entries. Dividend reclassifications also need to be monitored closely to make sure basis changes are made to the right lots. Added on top of the REIT issues are all of the other issues that arise to complicate record keeping when you are doing
It's a recipe for double trouble for a club treasurer.
So REIT's add a layer of complication to club accounting. If you want to keep your club treasurer's job as simple as possible, we recommend you avoid investing in them in your investment club.
We say this from experience. We've worked with many many treasurers trying to handle the end of year adjustments who tell us they are going to tell their clubs to "Sell the REIT asap" and not buy any more in the future.
Want to know if an investment is a REIT? Here's a list of many of them:
REIT's By Ticker Symbol
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