Reforming the Foreign Investment in Real Property Tax Act (FIRPTA) will spur billions of foreign investment in U.S. real estate debt and equity markets, help stabilize troubled domestic lending markets, create jobs and lead to economic growth, according to Real Estate Roundtable President and CEO Jeffrey DeBoer, who testified today on the specifics of FIRPTA reform before the House Ways and Means Subcommittee on Select Revenue Measures.
“FIRPTA is a discriminatory tax. It only applies to foreign investors in U.S. real property. The 35 percent FIRPTA tax, combined with state and local taxes, and frequently with the ‘branch profits tax’, results in a foreign investor paying a tax as high as 54 percent on any capital gain. In addition, the administrative burdens, and the costs associated with structuring investments in U.S. real estate with foreigners, is significant. No other asset class faces this tax. Foreign investors generally are not subject to U.S. taxes on capital gains from the sale of U.S. stocks and securities. Nor are they taxed on interest income from bank deposits and debt obligations that produce portfolio interest,” DeBoer said.
Three reforms that can be accomplished in the short term, according to DeBoer, include:
• The existing small shareholder exception for foreign investments in publicly traded Real Estate Investment Trusts (REITs) should be raised from current law’s 5 percent to 10 percent. This change would allow a foreign investor owning 10 percent or less of a publicly traded REIT to sell shares without triggering FIRPTA.
• IRS Notice 2007-55 should be withdrawn. The notice applies FIRPTA to liquidating distributions received by foreign investors from private, domestically-controlled REITs. Withdrawing this notice, which does not require legislation, would have significant positive benefits in smaller markets where capital investment is most needed.
• The Treasury Department and the IRS should provide guidelines for foreign investors regarding when they can originate debt and how they can restructure existing debt. Such guidance would attract significant foreign investment into U.S. debt, providing some relief for U.S. borrowers in the current tight credit markets.
DeBoer summarized how simple tax reforms would spur billions of dollars in foreign investment in U.S. real estate debt and equity markets – “Importantly, the end result would be to make our nation globally competitive for investors looking to invest in real estate.”
