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Reit taxation
December 28, 2020
1:38 pm
topgun
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I found XIRR() function in the last week or so. It works perfectly. It uses the actual transaction date compared to IRR(). I will try uploading a spreadsheet to see if I have a problem. I have never done this.

I get File extension error.
File: Book1.xlsx.

No help for why there is a problem with extension.

Have a Great Day

December 28, 2020
5:37 pm
Norman1
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rhvic said
Thanks Norman. I checked my spreadsheet, and if I look at one more significant figure in my compound annual return, I too had 0.46% as my rate of return - in agreement with your method exactly (0.455% if you want three significant figures). So my formula appears also to have some validity, as long as cost base is greater than zero.

That's only because the error is small with that one particular set of data. The error will increase should more ROC be received.

For example, if one relabels an additional $1,000 of the same distributions as ROC, then the tax-cost based formula incorrectly gives a higher return of 0.663%. That increase is incorrect. There was no decrease in original amount invested, no increase in any of the distributions received, and no increase in the selling price on December 24!

The formula also does not account for when each distribution occurs. If one adds an extra $1,000 to the 15-Dec-2014 distribution, the IRR becomes 5.261%. The formula returns 4.152%.

December 28, 2020
5:50 pm
Norman1
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RAV4guy said

In my spreadsheet I had an initial cash flow of -4,425 for the purchase; then 7 years with annual cash flows of +305 for the income and finally in the last year a cash flow of +2,398 (the last years income of +308 plus the proceeds of the sale +2,090 (500 x 4.18)). The IRR calculated was .78%/year, which is similar to the other answers. I apportioned the income equally over the 8 years 2013 to 2020 which I see is not exact.

Unfortunately, that doesn't match what rhvic experienced. Distributions were monthly and not annual. rhvic invested late in the year and only received four monthly distributions in the first year. Also, there was a 46.7% distribution cut in April 2019.

One needs to use the exact cash flow dates and exact cash flow amounts to calculate IRR.

December 29, 2020
2:07 pm
topgun
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topgun said
I found XIRR() function in the last week or so. It works perfectly. It uses the actual transaction date compared to IRR(). I will try uploading a spreadsheet to see if I have a problem. I have never done this.

I get File extension error.
File: Book1.xlsx.

No help for why there is a problem with extension.  

Peter
Why do I have trouble uploading a Excel spreadsheet?

Have a Great Day

December 29, 2020
2:27 pm
Peter
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I don't think the forum allows you to upload spreadsheets. Can you upload it somewhere else, such as Google Drive?

May 3, 2021
2:52 pm
rhvic
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Once again, another April has passed, and a number of so called dividends received over the past year from REITs and ETFs have been redefined as "return of capital" or ROC, by the issuers. For a number of the names I hold, the amounts so redefined have varied from about a third to three quarters of the total annual distributions in 2020. So again, the advertised 'dividend rates' of supposedly say 10% on a REIT are actually much much lower.

I really do not want to invest in these names just so that they can dribble my own money back to me. Yes, the cost base goes down, but that is of no consequence in a registered plan. Perhaps I should dump all of these, and get some bank stocks!

May 3, 2021
3:27 pm
Bud
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U mean reit&divvy ETFs give off Roc not standard stock ones like sp500?

Ya im generally reluctant to invest in reits their structure is a bit sketch they seem to do cash calls more often. There was an opportunity to buy last year now speculation is driving some with condo development potential.

May 3, 2021
6:05 pm
AltaRed
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rhvic said
Once again, another April has passed, and a number of so called dividends received over the past year from REITs and ETFs have been redefined as "return of capital" or ROC, by the issuers. For a number of the names I hold, the amounts so redefined have varied from about a third to three quarters of the total annual distributions in 2020. So again, the advertised 'dividend rates' of supposedly say 10% on a REIT are actually much much lower.

I really do not want to invest in these names just so that they can dribble my own money back to me. Yes, the cost base goes down, but that is of no consequence in a registered plan. Perhaps I should dump all of these, and get some bank stocks!  

You don't understand the nature of ROC from REITs then. It is actually 'good' ROC which is nothing more than DD&A (CCA) in real estate investments - a bookkeeping item for depreciation of the building. Good ROC is actually much better than a taxable dividend (in non-reg accounts) because it is treated as tax deferred cap gains far into the future when the REIT is sold. Even in registered accounts, it is part of the cash distribution paid to you. You still get your advertised 10% distribution. What is not to like?

Many of these REITs are the sweetest assets to have, especially in non-registered accounts.

May 3, 2021
7:33 pm
Bud
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Sweet you mean like commercial and residential landlords bailed out again

May 4, 2021
8:07 am
Norman1
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Just because a taxpayer can depreciate a building 4% a year doesn't mean that the building actually loses 4% in value each year. That has been confirmed many times by taxpayers who later sell the building and receive more than even the original, undepreciated cost.

The tax or accounting treatment doesn't always align with the actual economic reality. The rent collected and shielded from income taxes by the depreciation is real money. That money can be used to pay mortgage, utilities, and even the university tuition of the owner's children.

My previous post explains the disconnect with return of capital distributions from a REIT.

May 4, 2021
9:41 am
rhvic
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Here is an example of an ETF which is not doing well, by my reckoning.

CGXF-T : CI First Asset Gold Giants Cvr Call ETF

The advertised yield on this ETF is (today) 11.38%

I originally invested $4906 in this fund. In 2020 they paid out $432, but last month they decided that $301 of that is ROC, thus reducing the actual 'dividend' to just $131.

Accounting for all the ROC over the four years I have held this, my cost base is now $3329. Even at that cost base, the actual income appears to be just 3.9%, not anywhere near 11%.

This is an ETF, not a REIT which might hold real estate, thus depreciation seems to play no role. Cost base is of no relevance to me here, as it is held in a registered account.

Some might be able to see a different sort of accounting than I do - but in my view they are simply slowly returning to me the money I used to buy the ETF.

Take as an illustrative example the following: you buy an ETF for $1000 which advertises a 10% dividend. At the end of a year you receive payments of $100, but say the ROC is then declared to be $90. Thus your return is now only $10 on a cost base of $910, which is a much lower 1.1% return. Not worthwhile at all.

May 4, 2021
11:53 am
Bud
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Norman1 said
Just because a taxpayer can depreciate a building 4% a year doesn't mean that the building actually loses 4% in value each year. That has been confirmed many times by taxpayers who later sell the building and receive more than even the original, undepreciated cost.

The tax or accounting treatment doesn't always align with the actual economic reality. The rent collected and shielded from income taxes by the depreciation is real money. That money can be used to pay mortgage, utilities, and even the university tuition of the owner's children.
  

U mean like most real estate investors cheat their tax then get bailed out at the end of every cycle so others can't afford homes.

May 4, 2021
12:26 pm
RAV4guy
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rhvic said
"Take as an illustrative example the following: you buy an ETF for $1000 which advertises a 10% dividend. At the end of a year you receive payments of $100, but say the ROC is then declared to be $90. Thus your return is now only $10 on a cost base of $910, which is a much lower 1.1% return. Not worthwhile at all."

In both the ETF purchase you cite and the example you pose you do not state the current market price of the investment so it is unclear what your rate of return really is.

In your example, if the ending market price is $910, then you have a series of cashflows which sum as follows; original purchase -1,000; income +100 and proceeds of the sale +910 = +10. So the rate of return over a year is low. If the ending market is the $1,000 originally paid one year ago then the sum of the cash flows is +100 and the rate of return on the original investment is indeed 10%. Your analysis is correct only if the market price of the investment decreases as the distributions are paid.

What is the current market value of your ETF investment with a cost base of $3329?

ROC is a tax matter. ROC is favourable from a tax prespective because it defers income taxation until the investment is sold and is then taxed as capital gains. However, if the investment does not seem to be holding or increasing market value then you are right to be sceptical about the advertised distribution rate.

May 4, 2021
1:02 pm
rhvic
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First, a correction. My eyesight is not what it once was: the correct value of my current cost base for this ETF is $3829, not 3329.

The current value of the ETF at today's price is $3774. So I am down $55 on that.

Totalling all of the distributions, and adjusting for ROC, I have received $287 in net distributions over 4 years. So my total net 'gain' on the investment is $232, which over the four years works out to about 1.4% on a compound annual basis. Way below the 11% I had hoped for.

May 4, 2021
3:01 pm
savemoresaveoften
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rhvic said
First, a correction. My eyesight is not what it once was: the correct value of my current cost base for this ETF is $3829, not 3329.

The current value of the ETF at today's price is $3774. So I am down $55 on that.

Totalling all of the distributions, and adjusting for ROC, I have received $287 in net distributions over 4 years. So my total net 'gain' on the investment is $232, which over the four years works out to about 1.4% on a compound annual basis. Way below the 11% I had hoped for.  

Some seem to think that a high ROC each year may not be a bad idea. My experience is anything REIT / ETFF that has a high ROC content each year, it rarely has any meaningful capital gain and the "indicated" div yield is not real yield so to speak.

May 4, 2021
6:24 pm
Norman1
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There's only so much of the "good" return of capital that is possible each year.

Buildings, for example, can often be depreciated by only up around 4% to 5% each year. Something else will be going on if one is receiving 8% annual distributions and 7% out of the 8% distribution is return of capital for tax purposes.

Your experience is not surprising. Many products marketed for yield are junk and are for the gullible. Such products have "monthly income" or "retirement income" in their marketing.

Some people are unrealistic. Such people may need $1.5 million to retire with interest rates around 1% to 2%. But, they don't have $1.5 million. Instead, they have $700,000. Instead of waiting until they have $1.5 million, they "reach" for a yield of least 4%.

Just by "coincidence", products start popping up that have a targeted payout of 4%. How about that!

Return of capital then happens when the actual returns falls short of the payout.

That's really different from a time when rent was 7% and 3% of the 7% was left after expenses. That 3% could then be shielded from income taxes by depreciation and spent by the real estate investor.

May 4, 2021
7:35 pm
AltaRed
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Clearly there are a lot of products that promise high yield and it is a no brainer some of that has to be ROC, and 'bad' ROC at that. There are many 'managed payout' funds that do exactly that.

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