Fundrise promotes itself as an easy way to start investing in real estate. Whether you’re considering investing or already investing, you probably want to know that filing your taxes will also be easy and won’t eat away at your returns. Here’s how Fundrise taxes work.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
What is Fundrise?
Fundrise is an online investing platform. Fundrise pools investors’ money and invests in a wide variety of commercial and residential real estate properties. It makes both equity (ownership) and debt (loan) investments.
Fundrise is a type of Real Estate Investment Trust or REIT. A REIT is a special type of company that makes investments like Fundrise makes.
Fundrise is a private investment. Investors must invest directly in Fundrise rather than through a public stock exchange. Fundrise says it can provide higher returns than stocks with less volatility than stocks and publicly traded REITs.
How do REIT taxes work?
There are several ways Fundrise and REITs distribute funds to investors. Therefore, you might have multiple types of taxable investment income.
REITs can distribute dividends, interest, capital gains, and return of capital. These are the same types of distributions bond and equity investors can get.
Ordinary dividends are your share of the REIT’s profits. For example, if Fundrise invests in an apartment complex, its profit is the rental income minus the operating expenses.
A REIT has to distribute at least 90% of its profits as dividends by law. Unlike stocks, REITs can’t choose to pay a lower dividend to fund growth. The result is you’ll usually get more dividends from a REIT fund than from a stock fund.
Ordinary dividends are taxed at your ordinary income tax rate according to your tax bracket.
Qualified dividends are taxed at a lower rate than ordinary dividends. Qualified dividends give corporations incentives to pay dividends to their investors. Under the tax law, REITs generally can’t issue qualified dividends.
A capital gain is when a REIT sells a property for more than it paid for it. If you invested $100 to buy a share of a property and got $110 when it sold, you have a $10 capital gain.
The capital gains tax rate is 0%, 15%, or 20%, depending on your capital income.
If you have a capital loss from a REIT or other investment, you can use it to offset your capital gains.
Return of Capital
A return of capital is when you get your original investment back. If you invested $100 to buy a share of a property and got $110 when it sold, you have a $100 return of capital.
There is no tax on a return of capital. You’re getting your own money back.
The reason return of capital is more common in real estate investments is that investments can end.
With a stock, the company can theoretically last forever until you sell it. A portion of the selling price is a return of your capital, but you usually don’t think about it that way.
When a REIT sells a property and gives your capital back without you placing an order to sell your shares, it’s important to identify that as a return of capital that you shouldn’t include in your annual income.
What tax forms do you get from Fundrise?
Fundrise sends three types of tax forms depending on the structure of the investment. You can see the structure of your investments in the Fundrise platform.
Which tax form you get doesn’t change your tax liability. It just changes what forms you need to fill out when you file your income tax returns.
Many people think of Schedule K-1 as a partnership tax return, but it’s also used for certain types of REITs that you hold like a partner. You get this form if you invested in the Fundrise eFund.
Form 1099-B reports proceeds from broker and barter exchange transactions. You can use this information to calculate your gains and losses. You may get this form if you liquidate shares in an eREIT or interval fund.
Form 1099-DIV reports your monthly or quarterly distributions of profits or dividends. You can get a 1099-DIV from any fund that paid you dividends, including ones that also send a K-1 or 1099-B.
Fundrise IRA Accounts
Fundrise also allows IRA accounts. You can take the usual tax deductions for contributions. Unlike other real estate investments, you do not need to open a separate real estate IRA, because you can create an IRA directly through Fundrise.
Like other IRAs, you don’t pay taxes on gains and dividends within your IRAs. Many individual investors prefer to hold REITs in an IRA because REITs generally generate more taxable distributions than stocks and bonds. The IRA helps you avoid those taxes.
Traditional IRA withdrawals are generally subject to income taxes. Early withdrawals from an IRA or Roth IRA may be subject to income tax and penalties.
You may get a Form 5498 reporting your contributions or a 1099-R reporting your withdrawals.
Looking to simplify your tax forms?
Many people say to use an index fund, like the Vanguard Real Estate ETF (VNQ) instead of a real estate crowdfunding platform. One reason is that you won’t get a Schedule K-1. Another is that it’s easier to get a single tax statement from your broker if you already use a broker.
Of course, a Fundrise investment operates differently from an index fund and generally has different risks and rewards beyond the tax implications. Talk to a Certified Financial Planner or other financial advisor about the suitability of index funds versus Fundrise investments for your portfolio.
Should you get professional tax advice for real estate crowdfunding investments?
Taxes for Fundrise and other real estate investments do tend to be on the more complicated side of things. You also need to consider the tax consequences of your other stock market and real estate investing.
Fundrise’s entry-level funds generally avoid issuing a K-1. If you have a small investment and most of your income is from wages, your biggest concern will usually be a few extra tax forms. However, it can still be useful to talk to a financial advisor before investing.
If you have more complex needs such as the following or are just unfamiliar with the tax rules that apply to Fundrise, you may want to seek professional tax advice before investing in real estate crowdfunding.
- Needing to keep your taxable income within a certain range
- Other capital gains and losses
- Other partnership income
- Other investments in the real estate market
- Long-term planning objectives such as your ability to move assets into a pooled income fund to avoid capital gains tax
- Concerns about any other particular tax consequence
Personal tax advisors can help you avoid expensive surprises when you go to file your taxes. Your particular circumstances are unique, and depending on your tax situation, small changes can affect your tax rates or other benefits you may qualify for.
Fundrise may send you several tax forms depending on what products you invested in. The tax rates are similar to stock and bond investments, but REITs often have more taxable distributions. If you use tax filing software, it’s easy to file your tax return even if you get several tax forms.