Answer
Feb 13, 2025 - 11:30 AM
Well, there are rare exceptions to the general rule that a REIT does not generate capital gains taxes. Most of the time because when a REIT sells a property inside the portfolio, they typically will do a 1031 exchange within the REIT itself. So it's not to trigger capital gains. From time to time, you'll see a large REIT portfolio where for some reason they'll sell a property and maybe not replace that property in time to do a 1031 exchange. But in my experience, it's very rare for a REIT to have internal capital gains be generated within the fund. And so the income that you are receiving from that REIT is taxable income. But on the other hand, there's also tremendous depreciation being passed down. As I mentioned, you do have carryover cost basis and when you exchange into a REIT. But because of the fact that most REITs have leverage, they also have significant depreciation benefits that pass down to investors. And so REITs generally and historically have been a great tool, not only providing consistent income, but receiving income that is favorable from a tax perspective because you're also able to claim your pro-rata share of the depreciation of that portfolio. But when you're exchanging into a REIT indirectly through one of these pre-read programs, the same principle applies where you're carrying over your original cost basis into that fund.
