How Realty Income Investors Are Benefiting From One Of Real Estate's Most Overlooked Tax Advantages

Realty Income Corp O has become something of a gold standard for investors who are chasing monthly income.

It's one of the few publicly traded companies with the guts, and the track record, to trademark its nickname: The Monthly Dividend Company®. With more than 15,600 commercial properties and over 660 consecutive monthly dividend payments under its belt, Realty Income is a REIT investors turn to when they want predictable income, even in unpredictable markets.

But there's another perk Realty Income offers its shareholders that doesn't show up in the yield column, and many investors don't even realize they're benefiting from it.

It's called depreciation, and as most real estate investors know, it can be one of the most powerful tax advantages available.

The Dividend Breakdown That Tells The Bigger Story

In 2024, Realty Income paid out $3.126 per share in dividends, more than 126% of its estimated taxable income. That may sound like a red flag at first, but it’s actually a feature of REIT taxation, not a flaw.

REITs are required to distribute at least 90% of their taxable income to shareholders in exchange for avoiding corporate income tax. But "taxable income" and "cash flow" are two very different things.

Thanks to depreciation, a non-cash expense that reduces taxable income without reducing actual earnings, REITs like Realty Income can pay out more in dividends than they report in taxable income. When that happens, the portion of dividends that are greater than the taxable income are treated differently.

Here's how that played out for shareholders last year:

• $2.17598 per share was classified as ordinary income
• $0.94952 per share was classified as a nontaxable distribution

That nontaxable portion isn't free money. It reduces the investor's cost basis in the stock, which can lead to higher capital gains taxes if and when the shares are sold. But for long-term holders, that trade-off can be more favorable than paying ordinary income tax every year on the full dividend amount.

In short: depreciation lets investors defer taxes today and potentially pay a lower rate later.

Why Realty Income Is A Favorite Among REIT Investors

Most investors are drawn to Realty Income for its reliable dividend and consistent growth.

Earlier this month, the company announced its 131st dividend increase since being listed on the NYSE, bumping the monthly payout from $0.2685 to $0.2690 per share. That may not sound like much, but when you compound reliable growth over decades, it adds up.

Despite ongoing challenges in the real estate market, analysts still see upside for the stock. Recent price targets from UBS, Scotiabank, and Wedbush suggest an average price target of $60.33, compared to the current price near $57.75. And that's on top of a 5.61% yield.

Realty Income isn't just a favorite among retail investors, it's also a sizable holding for several large institutional investors, like Vanguard Group Inc, BlackRock Inc. and State Street Corporation, which collectively hold nearly 300 million shares valued at over $17 billion. 

But this isn't the only real estate play that's been gaining the attention of major Wall Street firms. 

In 2024, there were more than $1.1 billion in securitizations for an asset class that has been flying under the radar until recently, and that number is expected to more than double this year.

This emerging asset class lets investors capture the upside of rising home values with a built-in cushion if prices fall.

There's Over $34 Trillion Trapped In This Corner Of The Real Estate Market

While Realty Income is built on commercial tenants like Walgreens, 7-Eleven, and FedEx, there's a parallel real estate market that may be even more compelling: owner-occupied home equity.

Americans have more than $34 trillion in equity tied up in their homes, a number that has more than tripled since 2013. And some of the biggest names on Wall Street have figured out how to tap into this growth. 

The strategy involves something called Home Equity Agreements (HEAs), and if you've never heard of this before it's because individual investors have been excluded from participating in this growing market. Until now anyway…

One of the first companies to begin operating in the home equity market recently launched a new fund available to individual accredited investors – U.S. Home Equity Fund I. The fund is targeting a 14%-17% net IRR to investors with a strategy that can provide positive returns even in a market downturn. 

See how investors are gaining access to this $34 trillion market and what sets this fund apart. 

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