Richard, I don't think the person who told you that is incorrect. Here is part of a post that I wrote to give my viewpoint.
brucedoe wrote, <<My understanding is that if the dividend exceeds the earnings, you will have to pay taxes on the part of the dividends not covered by earnings. Therefore, no earnings and you pay taxes on the whole bit.>>
This gets tricky because you have to blend existing law with the proposed change. Because of my background in taxes, I think I understand how it blends together. But, note, the operative word is "think", not "know".
My understanding is if a dividend exceeds the current year earnings, you will have to pay taxes on the part of the dividend that is in excess of the current year earnings only if the excess is out of prior years undistributed accumulated earnings.
In the case of most REITs, there is little or no prior year undistributed accumulated earnings. I know that because, first, REITs must pay out almost all of earnings (taxable income), and many pay out more that 100% of taxable income. Second, we know that because part of the dividends of many REITs are "return of capital".
There could be a lot of prior years accumulated earnings in the case of a profitable corporation that operated as a C-Corp for a time and then became a REIT. In that case, none of the excess dividend would be return of capital.
If part of the dividend of a REIT was classified as a return of capital in 2001, you can safely assume there is no prior year accumulated earnings (as defined by the tax law).
Therefore, in years where there is no current year taxable income before the dividend deduction, and where there are no accumulated earnings from prior years, all the dividend will be classified as a return of capital and you will not pay taxes on any of the dividend.
But, I have never owned a REIT that had no current year taxable income before the dividend deduction, but there may be some. I can see the possibility that a REIT that has preferred stock outstanding, might in a poor year allocate all the taxable income to the preferred dividends and not have any current year taxable income left to allocate to the common shares. |
