REITs can be of various types, in which the investor can invest while keeping in mind the tax implications that may arise upon the investor’s sale of such investment. Every investor should consider the tax implications of their proposed investments before making any kind of investment because it’s crucial to consider how their decisions will affect them when they sell their investments.
The following FAQs will help us better understand REITs, their types, and the tax implications and Risk associated with them.
What are REITs?
A real estate investment trust (REIT) is an entity that owns, manages, or finances real estate with the potential to generate revenue. REITs provide investors with a consistent income stream and it primarily invest in various types of property such as buildings, real estate, cell towers, offices, warehouses, and so on.
What are different types of REITs?
- Equity REITs: The most prevalent kind of real estate investment trust is the equity REIT. Investing in a variety of assets, such as offices, retail establishments, hotels, residential buildings, etc., is the main focus of this type of REIT. As a result of the REITs leasing or renting these assets further, they are able to generate income from the following assets.
- Mortgage REITs: MREITs primarily receive interest income because, in essence, these REITs lend money directly to landlords and their operators so that they can buy an alternate type of real estate. The interest paid on their mortgage loans is how Mortgage REITs make money.
- Hybrid REITs: Hybrid REITs is a combination of both Equity REITs & Mortgage REITs. By charging interest on loans and charging rental income to Equity REITs when they lease their properties, Hybrid REITs make money from both lending and renting. It is rare to find hybrid REITs these days.
What are the benefits of investing in REITs?
- Diversification: By increasing their exposure to real estate assets in a variety of industries and regions, investors can diversify their holdings.
- Entry & Exit: REITs are anticipated to eventually become fairly liquid assets, much like mutual funds. Real estate is traded as securities, so it will be much simpler to create supply and demand in this situation. As a result, entry and exit expenses won’t be a major concern for REIT investors.
- Liquidity: REITs provide investors with a liquid and easily tradable investment option by trading on stock exchanges.
What are the Risks associated with investing in REITs?
- Interest Rate Sensitivity: REITs can be affected by changes in interest rates, which may impact their borrowing costs and property valuations.
- Market Volatility: The value of REITs can be subject to fluctuations due to market conditions and investor sentiment.
- Real Estate Market Risks: REITs are exposed to risks associated with the real estate industry, such as changes in property values and rental income.
What are the factors that an investor should consider while selecting REITS?
- Property Type: Consider the type of properties the REIT invests in and evaluate the potential growth and sustainability of those property sectors.
- Management Team: Assess the experience, track record, and expertise of the REIT’s management team in successfully managing real estate assets. Financial Performance
- Financial Performance: Analyze the REIT’s financial statements, including rental income, occupancy rates, and debt levels, to determine its financial health.
Which REITS in India are the best performing?
- Urban REIT: Investing in high-end commercial properties in major urban centers. Strong rental demand and potential for capital appreciation.
- Residential REIT: Focuses on rental apartments and residential properties, benefiting from the growing demand for housing in urban areas.
- Retail REIT: Invests in shopping malls and retail properties. Offers stable income through long-term leases with reputable tenants.
- Industrial REIT: Specializes in industrial properties such as warehouses and logistics centers. Benefits from the growth in e-commerce and supply chain demand.
What is the tax implication on sale of such REITs?
- If Indian REIT units are sold and the proceeds are held for less than a year, a 15% short-term capital gains tax will apply.
- If units are held for longer than three years (36 months) and generate income of more than Rs. one lakh, they will be subject to 10% LTCG tax.
Conclusion and key takeaways:
REITs provide an accessible and diversified way to invest in real estate. Consider your investment goals, risk tolerance, and research thoroughly before choosing REITs to include in your portfolio.
The above article is written by Mr. Mihir Verma (mihir.verma@abacussolutions.co.in) and reviewed by Mr. Suyash Tripathi (suyash.tripathi@abacussolutions.co.in)
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If the income is less than Rupees One lakh then what is the LTCG tax rate even after 36 months