How Tax Equivalent Yield Maximizes After-Tax Returns for High-Net-Worth Investors

Quick Take: Taxes can dent portfolio returns, making tax-equivalent yield a critical measure for high-net-worth investors. With federal rates up to 37%, the 3.8% NIIT, and state levies, a 13% yield may shrink to just 6% after taxes. Real estate can offer advantages. Depreciation offsets taxable income without reducing cash flow. And REIT structures lower federal income tax rates by 20%. In Origin’s IncomePlus Fund, these benefits translated to a 6.3% after-tax return in 2024. Equivalent taxable investments would require 10% to 13% returns, usually with greater risk—highlighting real estate’s edge in preserving wealth. 

For high-net-worth investors, taxes are often the single largest drag on portfolio returns. With ordinary income taxed federally at up to 37%, plus a 3.8% net investment income tax (NIIT) and state levies, the tax-equivalent yield—the true yield—from many traditional investments is far lower than the advertised return. 

Consider the math. A New York investor in the highest tax bracket earning 13% from an investment that generates ordinary income will pay close to 52% in total taxes. But they will only generate a 6.28% after-tax return. Taxes should never be the reason you invest, but the impact of taxes must be considered when evaluating investments. Investments such as real estate have built-in tax advantages that give this asset class a leg up over other investments.    

Depreciation: A Core Tax Benefit of Real Estate Ownership 

The ability to take depreciation on an annual basis is one of the greatest benefits of owning real estate. Depreciation shields income from taxes by creating losses that get offset against income but don’t impact cash flow. The net result is a higher after-tax cash flow to investors.  

Residential rental properties are depreciated per an IRS schedule over 27.5 years. That means a portion of the building’s value is taken as an expense each year. For example, let’s say we acquire an apartment building for $85 million with an estimated land value of $5 million. We could depreciate $80 million over 27.5 years. This equates to an annual depreciation expense of a little more than $2.9 million. If the property were to generate $5 million in net operating income (NOI), only $2.1 million would be taxable. Normally, this income would be taxed at ordinary rates. But real estate offers another significant tax benefit if owned in a REIT structure.     

The REIT structure reduces the top federal tax rate on qualified REIT dividends by 20%, from 37% to 29.6%. In the example above, with $2.1 million of taxable income remaining after depreciation, the total tax liability under the REIT structure would be roughly $620,000. That makes the effective tax rate about 12.4% on the original $5 million of income. High income-earning investors will also be subject to the 3.8% NIIT, which adds about $80,000 in this example. That brings the total liability to roughly $700,000, for an effective tax rate of about 14%. That’s far less than 40.8% total tax rate on non-real estate investments.   

How Tax-Equivalent Yield Benefits Our Investors   

Our IncomePlus Fund utilizes both depreciation and a REIT structure. The fund generates a little more than a 6.4% pre-tax yield today and produced an after-tax return of roughly 6.3% in 2024. The tax slippage in 2024 was minimal due to our ability to utilize these tax shields. An investment taxed at ordinary rates would have to generate a return between 10.6% and 13.6% to produce the same after-tax return, depending on the state where you live. An important point to consider in this equation is that investments producing a return of this magnitude usually carry far higher risk as well.  

Tax-Equivalent Yield: A True Measure of After-Tax Returns  

The table below shows the taxable equivalent yield required in all 50 states to generate a similar after-tax return as the IncomePlus Fund. Chasing higher returns has its benefits in a portfolio, but those returns are hard to come by if half of it goes to the government. The only thing that matters is what you keep after accounting for taxes. That’s why it’s imperative to evaluate every investment through the lens of pre- and post-tax returns.  

The impact of the taxable equivalent yield depends on where the investor lives. Below is a comparison of after-tax yields in each state, ranked from highest to lowest.  

Comparing Tax-Equivalent Yields Across States