Another Favorite Investment - iStar Financial
iStar Financial (SFI) is a MREIT that specializes in complex corporate real estate lending. I've owned it for several years and it's been a great investment (both capital appreciation of 44% and my cost-based yield of 11.5%). Although I have discussed in the past that you should hold REITS and MREITS in tax deferred, tax free or kiddie tax accounts, this happens to be in my taxable account.
I have always assumed that the taxes on the dividends from iStar would get smacked with my marginal income tax rate (28% federal). Not so... based on the latest press release from iStar:
During 2005, taxable dividends for iStar Financial's common stock were $2.93000 per share. For tax reporting purposes, the 2005 taxable dividend will be classified as follows: $1.90554 as ordinary income, $0.37271 as 15% capital gain, $0.03419 as 5% capital gain, and $0.61756 as return of capital.
I had no idea that an MREIT had different levels of taxation from their dividends. This is definitely good news and it somewhat impacts my thinking about whether they should be put in tax-deferred accounts.
I took the iStar dividend numbers into excel and calculated my my true tax rate on the 2005 dividends. It turns out that at a 28% marginal tax rate, iStar would be taxed at 20%. This moves my after-tax, cost-based yield from 8.2% to 9.1%... a full 90 basis points!
It will be interesting to see if E*Trade properly reports this on my 1099.