For 35 years, the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)
has provided a pathway for foreign investment into American real estate
development. Changes are coming from the implementation of the Protecting
Americans From Tax Hikes Act of 2015, which are the first reforms in over
three decades that affect the status of foreign investment.
FIRPTA reforms are designed to spur investment from foreign investors by
modernizing some exemptions of the law, making foreign investment into
American real estate more appealing. On December 18, 2015, President Obama
signed into the law the Act to extend certain tax relief provisions that
were expiring at the end of 2014. The Bill was written to create legislative
reforms to FIRPTA designed to bring in additional investment into a struggling
There are a few major changes provided for in the reforms. The new Act
exempts certain foreign pension funds and their subsidiaries from FIRPTA
taxation. This will hopefully spur on more participation from these groups.
It also increases the amount of Real Estate Investment Trust (REIT) stock
participation that is available to foreign investors from 5 to 10 percent.
The new rule creates a FIRPTA tax exemption for foreign investors upon
the sale of a REIT stock or receipt of dividends. A third rule provides
guidance on whether a REIT should be considered a domestically controlled
entity. It allows REITs the ability to presume that all shareholders with
less than a 5 percent stake in the REIT are U.S. citizens. The numbers
can then be applied towards the 50% ownership mandate required for a REIT
to be defined as “domestically controlled.”
Impact on U.S. Real Estate Investments
It is yet to be determined how the new rules will alter the commercial
real estate investment landscape, yet the reform provisions being presented
make it easier for foreign investors to participate in a more attractive
market. With almost a quarter of all publically traded REIT’s in
California alone, the impact in the western markets could be dramatic.
Recent surveys show that nearly two-thirds of foreign real estate investors
intend to increase their portfolio in 2016. Industry experts hope that
the new rules will make those statistics a reality through offering higher
after-tax returns from real estate investments than would be gained from
other non-real estate or foreign investments.
While there has already been significant investment into the high-value
office space markets such as New York, Chicago, and the like, indicators
show that secondary market participation is picking up. Investors taking
advantage of the new tax rules may be looking to hedge some of their office
space assets with investments into non-traditional commercial real estate
such as industrial buildings and rental housing.
As investment increases, the strategies for structuring investments will
also evolve. Before the new reforms, investors would set up complicated
U.S. corporate tax blockers to help defer tax liability incurred after
sales of REIT stocks. These investment structures would often hinder the
buying and selling of investments and ultimately increased the complexity
of the investment process. Under the new rules, it may eliminate the need
for these structures in some cases, making it far easier and more transparent
for the foreign entity. The ability to freely buy and sell real estate
investments without worry of overly burdensome tax liability, should in
itself, be a boon to the commercial market.
The new reform actions are an indication of Congress’ continued dedication
to spurring on U.S. investments. While the commercial real estate market
is still recovering from the economic crunch of 2008, the new rules should
offer clarity to an industry still seeking outside investment. With a
market uptick already being seen in 2016, it is the hope of analysts that
these new rules will provide accelerated growth and interest in U.S. commercial
real estate investments.
Contact Geraci Law Firm at (949) 298-8050 today, for more information.