Rep. Joseph Crowley Introduces Bill to Reduce Barriers to Foreign Investment in U.S. Real Estate

Yesterday, Rep. Joseph Crowley (D-NY), along with co-sponsors Rep. Melissa Bean (D-IL) and Rep. Patrick Tiberi (R-OH), introduced H.R. 4539, the Real Estate Revitalization Act of 2010 (RERA). This legislation would amend the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) by removing some of the artificial tax barriers to foreign investment in U.S. real estate. Such changes are important to eliminate the current tax bias in favor of debt financing and to assist U.S. real property owners in accessing equity capital from around the world at this time of great distress in the debt and broader financial markets.

RERA would: 1) eliminate the "U.S. Real Property Holding Corporation" provisions of FIRPTA; 2) characterize REIT capital gain distributions to foreign shareholders (that are attributable to the disposition of U.S. real property) as ordinary dividends subject to a U.S. withholding tax of 30 percent (or lower treaty rate); and, 3) treat REIT liquidating distributions as ordinary dividends subject to a 30 percent U.S. withholding tax (or lower treaty rate) to the extent that a distribution exceeds the foreign investor's basis in its REIT stock. RERA would not change the tax treatment of U.S. investors in REITs and other corporations that invest in U.S. real estate.

Under RERA, FIRPTA would continue to apply to gains from the disposition of direct foreign investment in U.S. real estate. However, shares in REITs and other real property holding corporations would no longer be "U.S. real property interests," and, therefore, foreign investors would be subject to uniform U.S. tax treatment upon the sale of stock in a U.S. corporation (regardless of whether it invests in U.S. real estate or other assets). Furthermore, RERA's proposed change with respect to REIT capital gain distributions would extend to all non-U.S. REIT shareholders the current U.S. tax treatment applicable to foreign shareholders owning five percent or less of a listed REIT.

NAREIT advocates a variety of constructive steps to reform FIRPTA. As a result, NAREIT supports RERA.