Disclaimer: We are not legal or accounting advisors, so please consult your local tax advisor and attorney before making investment decisions.

As with any investment, taxation plays a huge part in determining net returns.

There are a few questions we often hear from foreign investors contemplating an investment in a Compound Cityfund:

  1. How much of the return is subject to tax?
  2. How much is that tax?

It is important to note that all Compound Cityfunds are taxed and structured as REITs, or real estate investment trusts. So, to give you some useful information, we’ll review the general rules regarding taxes on REIT investments. Of course, there are always exceptions so please also conduct your own research.

A REIT is a type of US corporation, especially designed to be a tax-efficient vehicle for real estate investment. REITs confer many tax benefits to both domestic and foreign investors.

In general, when foreign investors invest in REITs:

  • Income flows from the US investments through the REIT to the fund.
  • The REIT serves as a blocker to the non-US investors preventing them from being engaged in a US trade or business.
  • The REIT will not be taxed on its income so long as the REIT distributes 90% of its income to its shareholders. (However, many REITs distribute 100% of their income to avoid this tax.)

Returns from publicly-listed REITs can come from:

  1. Share price appreciation.
  2. Dividend distribution from income derived from the properties held by the REIT.

Taxes on both are viewed differently.

  1. Share price appreciation. This occurs when the investors sells its shares and realizes a profit on the sale. Dependent upon how long the investor has held the shares, the capital gains could be considered short-term or long-term. If the asset was held for less than one year, the shareholder’s short-term capital gains liability is the same as his marginal tax rate. If the REIT held the property for more than one year, long-term capital gains rates apply; investors in the 10% or 15% tax brackets pay no long-term capital gains taxes, while those in all but the highest income bracket will pay 15%. Shareholders who fall into the highest income tax bracket, which is currently 37%, will pay 20% for long-term capital gains.
  2. Dividends paid by REITs in general are subject to the US withholding rules applicable to dividends paid by any US corporation.

Given the tax-friendly structure of REITs to foreign investors, there are exceptions to these taxes which can make an investment in a US REIT a really attractive proposition.

  1. A foreign investor disposing of shares in a domestically controlled REIT (i.e., if 50% or more of the REIT stock is owned by US persons) generally is not subject to US tax on the gain. We anticipate that Compound Cityfund REITs will be domestically controlled.
  2. Ordinary dividend income received from a U.S. REIT is generally subject to 30% U.S. withholding tax. This withholding tax can be reduced when an international investor qualifies for U.S. treaty benefits and provides valid and complete U.S. withholding tax documentation to the REIT. The withholding tax on ordinary dividend income is reduced to 15% in most U.S. income tax treaties. However, certain investors may be able to qualify for a 0% withholding rate on ordinary dividend income. As a foreign investor, it is important to check the status of any treaties your country may have with the U.S to take advantage of these benefits.
  3. If the investor is a foreign government or Sovereign Wealth Fund controlled by a foreign government, then dividends and gains on disposition of REIT shares can be exempt from US tax while the REIT itself is also not subject to US tax. This exception overlaps with certain other exceptions, and is therefore examined on a case-by-case basis.

For more about how foreign investors should consider investing in US REITs, we found this report from Deloitte to be very helpful and encourage you to read it carefully.

Besides the tax-advantages, the benefits of investing in a Compound Cityfund include simplicity, transparency, liquidity, and low fees.