For the last three years, PLACES has published articles by Congressional and business leaders calling for reform of the burdensome Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) – and last month, President Obama signed into law a bill that brings substantial relief to all those seeking to bring foreign capital into the American real estate market. FIRPTA reform, a goal for all those committed to growing the U.S. economy, is finally a reality and one that will make U.S. real estate across all categories more competitive and more attractive to investors around the world.
The new law exempts qualified foreign pension funds and any entities they own from FIRPTA taxation. The exemption now provides for American-owned funds and foreign funds to be treated equally with regard to taxation whenever U.S. real estate assets are sold. This long sought tax leveling also applies to direct investments or on any investments made through partnership structures or via private equity funds.
The enactment of FIRPTA reform will also have an important impact on any foreign investors interested in publicly traded REITS. Previously, foreign investors could only escape costly FIRPTA taxation if they limited their stock ownership to 5 percent or less of the overall REIT. The law signed by President Obama allows foreign investors to increase their ownership of REITs to ten percent before triggering FIRPTA tax penalties.
The reform became law as part of a broader package extending business tax cuts, officially known as the Protecting Americans From Tax Hikes (PATH) Act of 2015. That package passed both chambers with wide margins, first in the House by a vote of 316-33 and then in the Senate by a vote of 65-33, and President Obama signed it into law on Dec. 18. The provision addressing FIRPTA was co-sponsored in the House by Ways and Means Chairman Kevin Brady (R-TX) and committee member Joe Crowley (D-NY); in the Senate, Finance Committee members Mike Enzi (R-WY) and Bob Menendez (D-NJ) took the lead.
In the words of Real Estate Roundtable President and CEO Jeffrey D. DeBoer, “FIRPTA policy changes in the omnibus package are the most significant reforms of the Foreign Investment in Real Property Tax Act since its enactment in 1980.” He further said that by breaking down outdated tax barriers to inbound investment, “FIRPTA relief will help mobilize private capital for real estate and infrastructure projects, such as roads and bridges, while driving growth in construction and related jobs,” across the United States.
PLACES has long believed that FIRPTA reform was necessary if the U.S. real estate market was to remain appealing to foreign investors – especially in the last five years when a number of industry surveys revealed rising interest in South American and Asian real estate markets. PLACES brought in opinion pieces by some of the bill’s leading champions in the Capitol — Sens. Menendez and Enzi and Rep. Crowley — to make the case in these pages. For the last two years, PLACES has also included influential thought pieces on this issue from Clifton (Chip) Rodgers, Jr., Senior Vice President of the Real Estate Roundtable, who consistently made the case for FIRPTA reform. PLACES agrees wholeheartedly with this point of view, and was delighted to have helped showcase the need for reform and looks forward to a robust new climate for foreign investment in U.S. real property in every category in 2016.
