Nareit's policy priorities include:
On Dec. 22, President Trump signed into law the Tax Cuts and Jobs Act, Pub. L. No 115-77. This legislation reduced tax rates and made other significant changes generally effective in 2018 that are explained in detail here. There are significant interpretative and implementation issues that need to be resolved either by future legislation or guidance from the Treasury Department, and Nareit will be a full participant in this process.
Foreign Investment in Real Property Tax Act (FIRPTA)
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. Congress enacted significant FIRPTA reforms in December 2015 that Nareit strongly supported but there is more that should be achieved in this area both legislatively and on a regulatory basis.
The like-kind exchange rules recognize that the exchange of one property held for investment or business use for a similar property does not change the economic status of the taxpayer and therefore should not be taxed. As they apply to real estate, like-kind exchange rules have led to a more dynamic real estate sector – one that encourages reinvestment and construction activity and allows real estate owners to better allocate resources. The rules also lead to lower levels of debt in commercial and multifamily real estate transactions. Over the last few years, there have been several legislative and regulatory proposals to eliminate or restrict like kind exchange deferrals.
Marketplace Fairness levels the sales tax playing field by ensuring that sales taxes are applied equally – whether the sale occurs at a physical location or online. It would ensure that main street businesses are not unfairly burdened with a government-sanctioned price disadvantage over their online competitors. On June 21, 2018, the U.S. Supreme Court issued a 5-4 decision in South Dakota v. Wayfair, eliminating a prior Supreme Court decision holding that online retailers without a “physical presence” in a state were exempt from sales and use tax collection, and applying substantially the same rules regarding sales and use tax collection to both online and brick-and-mortar retailers.
A proposal was raised in the Hawaii state legislature in 2015, 2016 and 2017 to eliminate the dividends paid deduction (DPD) for all real estate investment trusts in the state. Nareit opposed the proposal. Eliminating the DPD would be contrary to the federal income tax rules applying to widely held REITs in every state but one with an income-based tax system like Hawaii. Based on filings with the Securities and Exchange Commission and other data sources, more than 20 widely held REITs have invested about $13 billion in commercial real estate in Hawaii, resulting in the employment of many Hawaii residents.
Housing Finance Reform
In the wake of the 2008 financial crisis, the US government seized control of mortgage giants Fannie Mae and Freddie Mac. As a result, the federal government now backs 70 percent of all new residential mortgages, according to the nonpartisan Congressional Budget Office. Policymakers have been struggling for years to determine a legislative solution to reduce the federal government’s newly-expanded role in the US housing market. REITs have been one of the few bright spots in supplying private capital into housing finance.
The Organization for Economic Cooperation and Development (OECD) is an organization of industrialized countries responsible for creating a model tax treaty known as the Model Tax Convention. Since 2006, Nareit and its foreign partners in the Real Estate Equity Securitization Alliance (REESA) have worked collaboratively with the OECD on REIT-related provisions in the treaty.
As the market for real estate investment trusts continues to grow, it is critical that individuals have access to accurate and impartial data to make informed investment decisions. One important non-GAAP measure is Nareit Funds from Operations (FFO), which is used by REITs as a supplemental measure of operating performance. FFO is not intended to be used as a measure of the cash generated by a REIT nor of its dividend paying capacity. Nareit believes that statements of cash flows provided for by GAAP financial statements are adequate for analysts to assess the cash generated and used by REITs. Nareit is committed to increasing the use of Nareit-defined FFO and improving the understandability and uniformity of FFO estimates. In recent years, Nareit has urged member companies that provide FFO guidance related to a company-defined version of FFO to provide guidance on Nareit-defined FFO as well.
Investment Company Act of 1940
The Investment Company Act of 1940 is a pillar of US financial law which regulates open-end mutual funds, unit investment trusts and closed-end funds. However, the law lays out in plain language a broad exclusion through which many publicly-traded REITs are exempt from regulation as an “investment company.” In 2011, the Securities and Exchange Commission, which is tasked with enforcing and regulating the act, issued a concept release soliciting comments regarding mortgage companies exclusion from registration as investment companies.
In an effort to prevent future runs on banks, a number of nations including all G-20 countries agreed to the Basel III regulatory framework in 2010, which strengthens bank capital requirements by increasing bank liquidity and decreasing bank leverage.
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