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. In the 113th Congress, Sens. Robert Menendez (D-N.J) and Michael Enzi (R-Wyo.) introduced the “Real Estate Investment and Jobs Act;” in the House, Reps. Kevin Brady (R-Texas) and Joseph Crowley (D-N.Y.) offered similar legislation. NAREIT has strongly supported both the House and Senate bills. Last year, Senators Menendez and Enzi filed a modified version of their bill as an amendment to the highway bill. The Menendez/Enzi proposal includes two critical provisions: first, it would increase the ownership stake that a foreign investor can take in a publicly-traded company whose assets consist largely of US real property without triggering FIRPTA liability and extend the provision to certain collective investment vehicles; second:, it would remove the tax penalty that FIRPTA imposes on foreign pension funds that invest in US real estate and infrastructure. In November, NAREIT and the other large commercial real estate trade associations sent a letter to then-Senate Majority Leader Harry Reid and then-Senate Minority Leader Mitch McConnell asking for passage of the Menendez-Enzi proposal.

It is widely expected that the 114th Congress will again attempt to reform FIRPTA. President Obama, in his FY2016 budget, recommended to exempt foreign pension funds from the FIRPTA, as had his previous two budgets.

STATUS: On Feb. 11, 2015, the Senate Finance Committee unanimously approved doubling the ownership level mentioned above from 5 percent to 10 percent for listed REITs.

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