February 11, 2015
FIRPTA Reform REIT Proposal Adopted by Senate Finance Committee
Earlier today, the Senate Finance Committee unanimously adopted a proposal to reform the Foreign Investment in Real Property Tax (FIRPTA). It would raise from 5 percent to 10 percent the amount of stock a foreigner could hold in a publicly traded U.S. REIT without triggering FIRPTA.
The proposal, crafted by Committee members Senators Mike Enzi (R-WY) and Bob Menendez (D-NJ), represents a partial version of FIRPTA reform legislation the two Senators introduced last Congress as S. 1181, the "Real Estate Investment and Jobs Act of 2013," which had been co-sponsored by all of the returning Committee members. Today’s Committee action is an important step toward achieving the reform of FIRPTA that NAREIT, The Real Estate Roundtable and a coalition of other real estate organizations have been advocating for several years. Prior to today’s vote, NAREIT sent a letter to all Committee members encouraging their support for the proposal. In addition, NAREIT added its name to a coalition letter sent to each Committee member.
Similar to S. 1181, the Committee-adopted proposal includes language to increase the current "portfolio investor" exception for sales of stock and capital gains dividends of listed REITs from 5 percent to 10 percent. This provision, which in a slightly different form passed the House by a vote of 402-11 as a stand-alone bill in 2010, would conform the definition of "portfolio investor" for FIRPTA purposes to the standard used in tax treaties and foreign investment in U.S. debt securities. REIT dividends paid to non-U.S. portfolio investors would remain subject to U.S. withholding (but not FIRPTA) tax. In addition, the Committee included several provisions related to general tax compliance and enforcement to “pay-for” the overall cost of the FIRPTA proposal. A publication issued by the Joint Committee on Taxation explains the details of this legislation in greater depth.
"NAREIT is pleased with the Committee’s action today and expresses its appreciation to Chairman Orrin G. Hatch (R-UT) and Ranking Member Ron Wyden (D-OR) for agreeing to consider the FIRPTA proposal as part of a group of non-controversial tax proposals that had bipartisan support from Committee members," stated Steve Wechsler, NAREIT President & CEO. He added that "NAREIT commends Senators Enzi and Menendez for their tireless efforts in recent years to achieve FIRPTA reform. Today’s outcome is a direct result of their unremitting efforts to bring this issue before Congress."
In addition to Senator Menendez, NAREIT also thanks Senators Johnny Isakson (R-GA), Wyden and Chuck Schumer (D-NY) who during the mark-up voiced support for the proposal. Senator Menendez said, "It is an important reform measure that will infuse additional investments into the United States, incentivizing construction, creating jobs and economic growth." Senator Isakson said, "We have the best real estate investments in the world, we are the safest economy in the world, and we are a safe haven for people to bring their dollars. To have a prohibition against investment in something that you can’t move and there’s not going to be more of, like real estate, is really shortsighted." Senator Wyden said, "Since I got on this committee, I thought one area that has always gotten short shrift is the effort to attract private capital to American infrastructure and American real estate. The fact of the matter is what Senator Menendez and Senator Enzi have done is created a path that allows us to tap the potential of hundreds of billions of dollars for investment in American real estate and infrastructure."
During the Committee’s mark-up, a number of Senators stated their belief the Committee should continue pursuing additional reform of FIPRTA in the future, such as exempting from U.S. tax under FIRPTA gains of foreign pension funds from the disposition of U.S. real property interests. This provision was part of an amendment offered by Senators Menendez and Enzi during last year’s highway bill and was again included in President Obama’s latest Federal budget proposal for Fiscal Year 2016. NAREIT and the coalition are on record as supporting this change in FIRPTA tax policy.
Chairman Hatch did not indicate when the full Senate would consider the FIRPTA proposal. In the meantime, NAREIT and the coalition will work with key supporters in the House of Representatives, who have also worked diligently in recent years to achieve FIRPTA reform, in order to make sure the reform momentum achieved by today’s Finance Committee action continues in the 114th Congress.
For further information, please contact NAREIT's Sr. Tax Counsel, Dara Bernstein, at email@example.com.