BDC and mortgage REIT income carries different tax treatment from bank dividends
The Motley Fool says investors should consider account location when holding high-yield BDCs and mortgage REITs, whose distributions are generally taxed at ordinary income rates.
Income from business development companies (BDCs) and mortgage real estate investment trusts (mREITs) is generally taxed at ordinary income rates, according to an article published by The Motley Fool. That differs from the more favourable treatment often applied to bank dividends.
The distinction matters because BDCs and REITs are structured to pass income through to shareholders. Provided they distribute at least 90% of taxable income, they generally avoid corporate income tax, leaving investors responsible for tax on the distributions.
The article cites AGNC Investment with an indicative dividend yield of about 13.5% and Annaly Capital at roughly 12.5%. Main Street Capital’s yield is put at 5.5%, excluding special dividends, while Ares Capital is cited at about 9.5%.
For investors seeking income, The Motley Fool suggests considering Roth individual retirement accounts or Roth 401(k)s for BDC and REIT holdings. These accounts are funded with after-tax money, and qualified withdrawals are generally tax-free, potentially changing the tax treatment of income that would otherwise face ordinary income rates.
The tax treatment of individual distributions can vary according to the issuer, the classification of the payment, the investor’s circumstances and the relevant jurisdiction. Roth withdrawals are also subject to eligibility and account rules, while the cited yields may have changed since publication.
