FAQ

What is a Mortgage REIT?

A mortgage REIT, or mREIT, is a REIT that makes or owns loans and other obligations that are secured by real estate collateral. Mortgage REITs invest in residential mortgage backed securities (RMBSs). 

What is an Agency mREIT?

Agency mREITs only invest in RMBSs with the backing of a federal agency, such as Fannie Mae, Freddie Mac and Ginnie Mae. Agency-backed RMBS paper is deemed to have virtually no default risk, thanks to the federal agency backing, but provides a low yield that is comparable to similar maturity U.S. treasuries and other highly rated debt. Agency debt does not have a true express government backing, but merely an implied one.

What is a Non-Agency mREIT?

Non-Agency mREITs hold portfolios of RMBSs without agency insurance. Non-agency RMBSs offer considerably higher yields when compared to agency-backed RMBSs, but also carry with them the significant risk of borrower default. Some non-agency mREITs are also called hybrid mREITs if they also hold agency paper, commercial mortgage paper, or some other mix of various classes of mortgage paper. 

What is a Hybrid REIT and/or Hybrid mREIT

A Hybrid REIT combines the investment strategies of both equity REITs and mortgage REITs. A hybrid REIT may also refer to a hybrid mREIT, that invests in multiple types of mortgage securities.

Are Mortgage REIT Dividends Subject to the 15 Percent Maximum Tax Rate or Non-Taxation in an Individual Retirement Account (IRA)? 

Because mREITs do not generally pay corporate taxes, the majority of REIT dividends continue to be taxed as ordinary income up to the maximum rate under the tax law, as determined by the shareholder's tax bracket. Exceptions could exist, but this is the general rule. In evaluating REIT dividends and comparing them to traditional corporate, you should consider your tax bracket and the currently higher tax rate. Many mREITs have sizable dividends. 

If in a tax sheltered, deferred or exempt account, such as an Individual Retirement Account (IRA), there may be no tax on mREIT dividends.

How Do Shareholders Treat Mortgage REIT (mREIT) Dividends for Tax Purposes?

All publicly traded companies, including mREITs, are required to provide their shareholders with information explaining how the prior year's dividends should be allocated for tax purposes. This information is often distributed to investors through their brokerage firm and/or by each company to its shareholders on an IRS Form 1099-DIV. 

Sometimes, REITs make a return of capital distribution, which is not taxed as ordinary income. Rather, the investor's cost basis in the stock is reduced by the amount of the distribution. When shares are sold, the excess of the net sale price over the reduced tax basis is treated as a capital gain for tax purposes. 

Do "1031 Like-Kind Exchange" Rules Affect Mortgage REITs?

Generally, mREIT stock does not qualify as investment property, and accordingly, it is not possible to effect a like-kind exchange, though some limited exceptions could exist on a one-time basis. Also, another provision of U.S. tax law (Section 721 of the Internal Revenue Code) permits owners of real property to exchange their property for partnership interests on a tax-deferred basis if certain conditions are met. 

Can REIT Dividends Constitute Unrelated Business Taxable Income (UBTI)?

Unrelated business taxable income (UBTI) is income earned by an otherwise tax-exempt or deferring entity that is deemed taxable income, because it is derived through activity unrelated to the tax-exempt purpose of the entity. An individual retirement account (IRA) is typically considered a tax-exempt account, but if it earns UBTI, it may have to pay tax on it.

General, REIT dividends do not generate UBTI, but it is possible. There are exceptions to the rule, including when a pension plan owns more than 25 percent of a REIT's stock, or in the case of certain mortgage REITs that use financing that is deemed a taxable mortgage pools.