FIRPTA Reform

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted by Congress in 1980 as a means to tax the gains on non-US citizens’ income from the sale of US real property. FIRPTA acts as a significant impediment to foreign investment in US infrastructure and real estate at a time when the country’s infrastructure needs are greater than ever.

As a practical matter, FIRPTA limits the amount that foreign investors are willing and able to invest in US REITs. Shareholders of a listed real estate company are not subject to FIRPTA if they own less than 5 percent of the company during the five years before they sell their stock, but above that threshold, foreign investors face an unnecessary tax liability. FIRPTA also does not apply when a foreign investor sells domestically controlled REIT shares, so long as the majority of the shares are owned by US taxpayers.

A bipartisan group in Congress has attempted to reform FIRPTA in the past. This year, Senate Finance Committee Chairman Orrin Hatch (R-UT) introduced S. 915, the “Real Estate Investment and Jobs Act”, which was based on legislation in the last session of Congress sponsored by Sens. Michael Enzi (R-WY) and Robert Menendez (D-NJ) to increase from 5% to 10% the ownership stake that a foreign investor can take in a publicly-traded REIT whose assets consist largely of US real property without triggering FIRPTA liability and extend the provision to certain collective investment vehicles; the Finance Committee unanimously approved it on Feb. 11. In the House, on April 30, Reps. Kevin Brady (R-TX) and Joseph Crowley (D-NY) introduced H.R. 2128 that similarly would increase the current 5% exception to 10% and would also remove the tax penalty that FIRPTA imposes on foreign pension funds that invest in US real estate. NAREIT has strongly supported both the House and Senate bills. President Obama, in his FY2016 budget, recommended to exempt foreign pension funds from the FIRPTA, as had his previous two budgets.

 

 

FIRPTA Archive


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