On Sun, Dec 12, 2010 at 6:44 AM, Leo Cardillo <cardillo@bellatlantic.net> wrote:

> Our Club is about to purchase shares in American Capital Agency (AGNC), a
> REIT firm.
>
> Before we do, I want to be sure that Bivio can handle this specific equity
> when it prepares the Club Tax Return.
>
> Please advise.

Dear Leo,

There are many issues to understand and account for when it comes to
REIT's and taxation.

For example,

1. REIT distributions are a combination of regular dividends, Return
of capital and capital gains. This means that each "dividend" entry
must be retroactively broken into several different accounting entries
manually.

2. The information about how distributions are divided up is not
received until after the end of the tax year. Until it is correctly
updated, all partnership records are tentative and tax information
provided to anyone who has withdrawn will be incorrect.

3. The dividend portion of a REIT distribution is a regular dividend,
not a qualifying one. This means it is taxed at ordinary income rates
rather than the preferential rate of no more than 15% that qualified
dividends receive.

4. If the Return of capital portion of the distributions accumulate
enough that your adjusted basis in your REIT shares becomes 0, future
return of capital amounts must be treated as regular dividend income.
This is something you would have to manually track and make
appropriate adjustments for.

5. Along with annual distributions, REIT's sometimes elect not to
distribute all earnings as required to keep their REIT status. This
triggers their payment of corporate income tax and a new form, form
2439, with additional information you must manually adjust for. These
manual entries are much more complicated than the first ones mentioned
and include manual adjustments to the 1065 and K-1 forms bivio
produces.

6. In addition, when you receive Form 2439 will depend on the tax
year used by the REIT. If it comes out after you have already filed
your club taxes, your club (and all your members) may need to file
amended returns.

For all of these reasons, we recommend that REIT's not be purchased
by your club. The tax reporting requirements are difficult enough for
an individual holding them. When the fact that income timing and
multiple owners are also factors that must be considered to do your
partnership accounting correctly, the issues and possibly costs
involved with keeping proper accounting records and preparing proper
taxes usually are significantly higher than the amount of income
realized by the investment.

So, Virginia, I would recommend that your club avoid owning this as a
club investment.

:)
--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend! www.facebook.com/bivio
Follow us on twitter! www.twitter.com/bivio




--
Laurie Frederiksen
Invest with your friends!
www.bivio.com

Become our Facebook friend!  www.facebook.com/bivio
Follow us on twitter!  www.twitter.com/bivio