One category where investors tend to overlook is the tax implications surrounding an investment.
Now, most investors do not need to know the ins and outs of the tax code to find a successful investment.
That being said, knowing some of the basics around taxes and investments can give you an even better chance of earning positive returns.
In this article, we review the tax implications around the Fundrise crowdfunded real estate platform. We will explain how taxes work with Fundrise and how we can plan for them before tax season approaches.
Fundrise eREITs that distribute dividends will be reported on tax form 1099-DIV. Fundrise eFunds will distribute partnership income on a tax form K-1. Any capital gains or losses from a Fundrise eREIT or eFund will be reported on tax form 1099-B.
When investing in Fundrise, it is important to understand what specific type of Fundrise investments are in your portfolio. This will determine how your Fundrise investment will be taxed.
Fundrise Tax Implications will come from one or a variety of these taxable events:
Capital gains or losses: when Fundrise sells a property they may realize a capital gain or loss. This will then reported on the partnership tax return and passed through to the individual investors via a K-1 tax form.
In addition, individual investors may also realize a capital gain or loss on the value of the Fundrise fund they purchase. If an investor buys a share in a Fundrise REIT at the price of $10 and later sells for $10.50 they will pay capital gains tax on the gain of $.50 per share. This will be reported on a 1099-B tax form.
Capital gains earned on Fundrise are subject to capital gains tax rates depending on the term of the investment.
Long Term Capital gains are taxed at 0%, 15%, or 20% depending on your ordinary income tax bracket.
Short Term Capital gains are taxed at the taxpayer’s ordinary income tax rate.
Dividends: Rental income earned from Fundrise properties is typically passed through to the shareholders in the form of dividends. Fundrise dividends are taxed as ordinary income to the shareholders.
Interest: When Fundrise participates in real estate debt investments any interest earned by the fund will be reported to shareholders in the form of interest. Interest earned on Fundrise is taxed as ordinary income to shareholders. Some interest payments can be received as dividend income from Fundrise REITs.
Fundrise eREIT - Set up as real estate investment trusts (REIT). REITs are required to pay out at least 90% of their net profit to shareholders in the form of dividends. Dividends will be taxed as ordinary income to shareholders. You can begin investing in Fundrise eREITs using the Fundrise Starter Portfolio.
Fundrise eFund - Set up as Real estate Partnerships. Investors are considered passive partners in the fund and will receive form K-1 at tax time.
A form K-1 is a tax document that reports tax implications from the ownership of a partnership investment. This document will outline whether there was ordinary income generated, capital gains or losses, as well as dividends or distributions to shareholders.
As mentioned above if you are a Fundrise eFund investor then you will receive a form K-1 to report on your income taxes.
When you report your K-1 on your United States income tax return the information will directly go to the appropriate schedules and forms.
For example, say your eFund earns both capital gains and dividends within a tax year. By entering the K-1 data on your 1040 tax return you will be reporting dividends on your Schedule B and any capital gains will be reported on Schedule D.
This is a U.S. tax form reported to individuals who receive income from dividends. Information on this form is required to be reported on your individual income taxes for that year. Fundrise eREITs will report any dividends earned on a Form 1099-DIV.
Fundrise dividends are taxed as ordinary income and do not qualify for the lower qualified dividends tax rate. For most REITs or companies to meet the requirements for qualified dividend status they must pay tax at the company level, which Fundrise REITs do not.
Certain Fundrise investors will receive a Form 1099-B for transactions in broker- barter exchanges. This form reports any proceeds from transactions where an investor may have realized a capital gain or capital loss. 1099-B may be reported if you have a real estate transaction and receive cash in exchange. Form 1099-B is required to be reported on your individual income tax return.
If you buy and sell Fundrise funds and realize a capital gain or loss, then you will receive a Form 1099-B to report this transaction on your tax return.
You have the option to invest in Fundrise via an Individual Retirement Account (IRA) managed by the Millenium Trust Company. Fundrise IRA accounts have a $75 annual fee, but allow investors to save and invest for retirement using the Fundrise platform.
Dividends or capital gains earned within a Fundrise IRA will not be subject to income taxes. The only time a taxable event occurs within a retirement account is when funds are disbursed out of the account.
Any contributions to a traditional IRA within a tax year may qualify as a tax deduction. This will depend on your household income level.
So you may be wondering how do the tax implications of Fundrise investments compare with a traditional real estate investment.
If you own your own residential rental property and you generate income from rents. As well as a variety of expenses from operating the rental activity. Many expenses can qualify to reduce the net profit of the rental. In the U.S. the rental property activity would then be required to be reported on Schedule E of the 1040 tax return.
The net profit of the rental activity is reported and taxed as ordinary income. This means you will pay taxes on the profit of the rental at the same rate as your ordinary income tax rate. Thus, you are receiving a similar tax treatment as Fundrise eREITs.
Traditional REITs are taxed in a very similar way to Fundrise eREITs. As most of the profit is required to be distributed to investors, shareholders will pay taxes on the dividend income they receive.
Traditional Real estate investment trusts (REIT) can be taxed as real estate partnerships depending on their structure. A form K-1 will then be issued to the shareholder or partner in the REIT.
Most REITs do not meet the qualifications to be taxed at the qualified dividend tax rate. Companies or REITs who meet the qualified dividends tax rate are typically taxed first at the corporate level. This is common for C-Corporations which are subject to double taxation, once at the corporate level and again at the shareholder level (dividends).
Investors who are currently invested in Fundrise or those who are considering it may be wondering how to lower their potential tax liability.
As Fundrise is a passive investment most of the investment decisions are left to the asset managers rather than the individual investors.
For this reason, there is not much an investor can do to lower their potential tax impact. However, according to Fundrise, Fundrise fund managers always take tax consequences into consideration when making investment decisions.
One of the ways Fundrise investors may be able to have some control over their tax liability is to choose when to buy and sell Fundrise funds based on the current share price.
For example, investors who would like to sell their position and incur a realized gain may want to wait until they have held their investment for at least 1 year so they can take advantage of lower long term capital gains tax rates.