FIRPTA 2015: Why it needed to be changed

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Foreign investors are already flocking to U.S. commercial real estate. But we may now see even more.

On February 11, 2015, the Senate Finance Committee approved a bill that would change portions of the Foreign Investment in Real Property Tax Act (FIRPTA).

The changes will now pave the way for increasing, “the maximum stock ownership that a shareholder may hold without the stock being treated as US real property interest (USRPI), as well as increase the percentage ownership threshold that results in treating a distribution to holders of publicly traded REIT stock, attributable to gain from sales of exchanges of USRPI, as a dividend...”

In an effort to bring in even more international money flow to the States, Senators Robert Menendez and Mike Enzi sought “to exempt foreign pension plans from real property sales tax—US pensions are already exempt—and raise from 5% to 10% the ownership stake at which foreigners are not taxed on a publicly traded company’s real estate investment yields,” according to Bisnow.com.

Foreign investors had regularly cited FIRPTA as a roadblock, as well.

If we can change it, it brings in greater chances for investment because – as it stands now – foreigners are subject to a high tax burden.

Created in 1980, FIRPTA was passed to tax foreigners’ gains on income from U.S. real estate.

Before this came into law, we had no opportunity to tax foreigners on any realized profit. At the moment, it requires a “10 percent withholding on the sale price of a property to ensure payment of taxes owed,” notes the Commercial Observer. “Reforming the law, which also imposes a 35 percent capital gains tax on some property sales, it is argued, will further open up the U.S. real estate market to foreign investors.”

“If U.S. lawmakers succeed in removing antiquated and unnecessary tax burdens on foreign real estate investors, an infusion of foreign capital will help jumpstart credit markets, fund infrastructure projects, and create jobs and economic opportunities in industries dependent on commercial real estate,” notes The Voice of the Foreign Real Estate Industry.