What is the fundamental issue?
The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980, initially as a response by Congress to concerns about increasing foreign ownership of farm land in the United States. The major purpose of FIRPTA was to establish equity of tax treatment in U.S. real property between foreign and domestic investors. In the 114th Congress, FIRPTA repeal bills were introduced in both the U.S. Senate and House of Representatives which attracted a great deal of support from commercial real estate stakeholders in the country, as well as an unusually high number of bipartisan cosponsors in the Congress. These bills, the Real Estate Investment and Jobs Act, would have amended FIRPTA to allow more foreign ownership of Real Estate Investment Trusts (REITs). The legislation was limited to making it easier for foreign persons to invest in U.S. commercial real estate through REITs without having to pay tax under FIRPTA. These bills represented a relatively modest provision that stops far short of repealing FIRPTA; however, if enacted, the legislation would have somewhat eroded the equity of tax treatment that FIRPTA established. On the positive side, economists estimate this change could bring billions of dollars of additional investment in U.S. real estate from foreign investors, which could have a beneficial effect for the economy and all real estate.
FIRPTA repeal bills have not yet been introduced in the 116th Congress.
I am a real estate professional. What does this mean for my business?
Some economists believe that FIRPTA has harmed the U.S. commercial real estate industry and held back economic growth. The United States greatly trails other major industrial nations in the amount of commercial real estate investment from foreign sources. Moreover, the U.S. real estate sector enjoys just a small fraction of the amount of foreign dollars invested into other parts of our economy, such as manufacturing and financial services. In a survey done in early 2014, three-quarters of foreign investors who responded indicated that FIRPTA relief would have a major or a positive effect on U.S. real estate investment activity. Thus, enactment of the legislation should increase investment in U.S. commercial real estate, which in turn could have positive growth effects on residential real estate as well.
NAR supports policies that encourage foreign direct investment in U.S. real estate through Real Estate Investment Trusts (REITs) that do not materially encroach upon the principle that all U.S. investors and foreign investors in U.S. real estate should be subject to similar sets of rules under the U.S. tax system. NAR is supportive of enactment of The Real Estate Investment and Jobs Act.
The Real Estate Investment and Jobs Act enjoyed an unusual amount of support of Members from both parties and in both the Senate and the House in the 114th Congress (2015-2016). Ultimately, neither the House or the Senate bill was passed into law in the 114th Congress.
FIRPTA repeal legislation was not introduced in the 115th Congress (2017-2018), and it has not yet been introduced in the current Congress.
Federal Taxation Committee
NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require a password.
Reporting and Paying Tax on U.S. Real Property Interests (Internal Revenue Service, Jan. 29, 2019)
ITIN Guidance for Foreign Property Buyers/Sellers (Internal Revenue Service, Aug. 2, 2018)
Complying with the Foreign Investment in Real Property Tax Act (FIRPTA) (National Association of REALTORS®, Apr. 12, 2016)
FIRPTA Withholding Rate Increasing to 15% (National Association of REALTORS®, Jan. 14, 2016)
Webinar: Changes to the Foreign Investment in Real Property Tax Act (FIRPTA) (National Association of REALTORS®)
Foreign Investment in Real Property Tax Act (FIRPTA) (Internal Revenue Service)
FIRPTA Withholding: Withholding of Tax on Dispositions of United States Real Property Interests (Internal Revenue Service)
Exceptions from FIRPTA Withholding (Internal Revenue Service)
The ABCs of FIRPTA (Commercial Observer)
Amended Rules Govern FIRPTA Dispositions (Journal of Accountancy) E
Definitions of Terms and Procedures Unique to FIRPTA (Internal Revenue Service)
PATH Act of 2015
PATH Act: Implications for FIRPTA, REIT Spin-offs, and Bonus Depreciation (Journal of Taxation of Investments) E
New FIRPTA Regulations Conform and Update Changes From the PATH Act (PricewaterhouseCoopers)
FIRPTA Changes Herald Increased Real Estate Investment Funding (National Real Estate Investor)
Six Ways the “Protecting Americans from Tax Hikes” Act Helps American Taxpayers (Committee on Ways and Means, U.S. House of Representatives)
More Details on the “Protecting Americans From Tax Hikes Act of 2015” (Committee on Ways and Means, U.S. House of Representatives)
The Twelve Most Important Provisions in the Latest Tax Bill (Tax Foundation)
11. New rules for real estate investment trusts are created (cost: $1.0 billion)
In recent years, it’s become increasingly common for companies to spin off their real estate assets into real estate investment trusts, to gain more favorable tax treatment. The PATH Act cracks down on this strategy, by imposing several limits on spinoffs involving real estate investment trusts (which are mostly similar to the ones I described last week).
Simultaneously, the PATH Act makes it easier for real estate investment trusts to attract foreign investments by relaxing some of the provisions of FIRPTA – a 1980s bill that imposed high taxes on foreign investment in U.S. real estate. Because there’s not much of a justification for the existence of FIRPTA (the law was born out of fears that foreign investors would buy up U.S. farm land), these provisions are positive changes to the tax code.
eBooks & Other Resources
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