Real estate investment trusts may be the big losers if President Bush pushes ahead with a proposal to eliminate taxes on dividends.
Since REITs don´t pay corporate taxes, they likely wouldn´t be covered under the legislation, said Lehman Brothers analyst David Shulman.
'As a result, should dividend taxation be eliminated, we believe REITs would lose a significant part of their relative appeal to income-oriented investors,' he said.
Details of the Bush administration´s proposed economic stimulus package are expected to be unveiled Tuesday. It´s not known if taxes on dividends ultimately will be partially or totally eliminated. If they´re totally scrapped, Shulman speculates some REITs may opt to convert to C corporations, the tax status for most companies other than REITs.
'The proposal is designed to eliminate double taxation,' he said. And as a C corporation, a company is better able to use depreciation to shield against taxes than an individual would if the individual shareholder continued to be taxed.
REITs also would lose in another area. The proposal likely would prompt non- REITs to hike their dividend payouts, making them more competitive with REITs, said Morgan Stanley analyst Greg Whyte. However, he believes it´s unlikely they would match REIT dividend payout ratios.
'We doubt that the new tax incentives would cause payouts to rise as high as those of REITs. However, new tax laws would make lower corporate dividends more competitive on an after-tax basis,' he said.
If REIT dividends are included in the tax proposal, Salomon Smith Barney analyst Jonathan Litt said, 'The group would see strong fund flows and price performance.'
Still, Litt said it´s 'unclear' if REITs will be included in the tax break. His feeling is that 'the IRS will not, at the end of the day, allow real estate to go completely untaxed.'
Wachovia Securities analyst Chris Haley estimates that taxes on REIT dividends amount to about $5 billion a year.
(source: Dow Jones Business News)