- The Washington Times - Thursday, May 29, 2003

If you’ve been getting a hefty dividend from shares of your real estate stocks, chances are you’ll pay about the same amount in taxes on them, despite new tax laws designed to decrease the tax on dividends.

That’s because most real estate investment trusts, or REITs, were excluded from parts of the $350 billion tax-cut package signed by President Bush this week.

Under the new plan, the tax that people will pay on dividends was cut to a maximum of 15 percent, but dividends from REITs — which are notoriously higher than most stocks — will continue to be taxed like normal income.

Why? Because REITs don’t pay corporate income tax, and are instead required to pay out at least 90 percent of their taxable income in the form of dividends. Thus, they are not subject to the “double taxation” that Mr. Bush and many members of Congress protested.

The good news for all investors, including REIT owners, is that the maximum income-tax rate declined from 38.6 percent to 35 percent under the new tax plan.

Mr. Bush originally called for the elimination of the tax on dividends. But REITs were never included in any part of the bill, despite the pleadings of real estate company executives.

In the end, the bill called for a decrease in the tax, rather than its elimination.

Some REIT dividends will still qualify for the 15 percent tax rate. If the REIT is distributing dividends from a subsidiary or other corporation that pays corporate income tax, the dividends will be taxed at the lower rate.

Also, any dividends paid out as part of a capital-gains distribution will be taxed a maximum of 15 percent.

REIT shareholders with lower incomes could also pay less, depending on their income-tax bracket.

Some analysts said that the exclusion of REIT stocks from the dividend-tax decrease will make them less attractive investments. But others noted that the overall stimulus package, particularly the decreases in income and captial-gains taxes, will help.

Analysts also said that a decrease in the dividend tax, rather than its elimination, means the difference in yields between REITs and other stocks will be small.

The average REIT, as of April 30, has a 6.75 percent yield compared with 1.8 percent for the S&P; 500, the National Association of Real Estate Investment Trusts reported.

NAREIT executives said they were confident REITs would still have a higher yield than most stocks.

“Assuming the highest tax rate, the after-tax dividend [for REITs] is at least three times greater than the after-tax dividend of the S&P; 500,” said Steve Wechsler, NAREIT’s president and CEO.

Jonathan Litt, an analyst with Smith Barney Citigroup, said the after-tax yield of most REITs will still be higher than 1,400 stocks in the S&P; indices.

In other news

• Defense contractor BAE Systems said it will lease 161,000 square feet in Arboretum II, a new tower office building on Monroe Street in Reston. It is the second large lease signed by BAE for space in Reston in the past 18 months.

In January 2002, BAE signed a lease for 134,000 square feet at Reston Commons on Sunset Hills Road. Both deals were brokered by CRESA Partners.

• Johns Hopkins University selected Transwestern Commercial Services to manage the Mount Washington Corporate Campus, a 70-acre mixed-use complex in Baltimore.

The campus has three new office buildings comprising 650,000 square feet.

Property Lines run Fridays. Tim Lemke can be reached at [email protected] or 202/636-4836.

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