Yes I think you're right. I read that it is taxable income that should be distributed to not be taxed. And depreciation expense is deducted from taxable income. However, some websites write, "REITs also distribute money from operating profits that are currently tax sheltered by depreciation and other deductions. These payments are considered a return of capital that lowers one's cost basis. If an investor holds the REIT for more than one year, it is fair to assume that the return-of-capital adjustments to basis give rise to long-term gains taxed at a favorable rate. In 2013, return-of-capital distributions constituted 14% of REIT payments". I'm now wondering if the SRG dividend is in fact an income taxable dividend or adjusts the cost basis of your shares.
Hmm interesting. I found this:
"What determines the breakdown of each distribution? Put simply, the REIT's earnings and profits and its business activities in general. A REIT generates earnings and profits. To the extent that it makes distributions out of these earnings and profits, this portion is taxable to unit holders at their ordinary income levels. To the extent that the REIT makes distributions that result from the sale of capital assets -- such as buildings -- this portion will be taxable to unit holders at long term capital gains rates. Finally, to the extent that the REIT makes distributions in excess of earnings and profits, this portion constitutes a return of capital. Why would a REIT make a distribution in excess of earnings and profits? There are a variety of reasons. A REIT that suffered a sharp decline in funds from operations, for example, might make a distribution with an unusually large "return of capital" component. REITs tend to avoid cutting back on distributions. As a result, a REIT facing a fairly unprofitable year but with a traditionally high distribution rate would necessarily need to draw on investors' capital to make the distributions."
I guess because GAAP income is negative, dividends are in excess and therefore considered return of capital? Odd since I my brokerage doesn't treat it as such.
I've got SRG in a rIRA so I think I'll need to figure this out. If memory serves me correctly, return of capital and Roth IRAs have some weird rules.
