Q&A With Gordon Pape: REITs In December

A reader wants to know: Is it a good idea to buy REITs in December?

Q – I’ve read not to buy mutual funds before year-end to avoid paying tax on capital gain distributions. Does the same caution apply to buying REITs in December? – T.J.

A – No. The problem with mutual funds is that many make only one capital gains distribution per year, in December. Sometimes that amount can be significant and the tax implications costly.

For example, suppose you buy 100 units of a fund for $10 each in early December. The company then announces a capital gains distribution of $2 per unit two weeks later. You receive the distribution, but the net asset value (NAV) of your unit drops by the same amount, to $8. You still have $1,000 in assets but now it is divided between $200 cash and $800 in fund units. And the $200 distribution is taxable if received in a non-registered plan.

REITs make payments monthly, so the cash flow is spread out evenly over a full year. This is a very different scenario from mutual funds, so the same caution does not apply. – G.P.

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