Recently Congress passed changes to the Foreign Investment in Real Property Tax Act (FIRPTA) that are expected to help increase cross-border investment in U.S. real estate.
The act, which was originally created in 1980 to obtain an income tax from foreign entities and non-U.S. citizens who sell U.S. real estate was reformed at the end of last year.
In mid-December, Congress raised to 10% from 5% the amount that a foreign investor can invest in a domestic real estate investment trust (REIT) without triggering FIRPTA. Importantly, it also now allows foreign pension funds to invest in U.S. real estate and infrastructure without being subject to FIRPTA. What this does is essential equalize the tax treatment of domestic and foreign pension funds when it comes to investments in U.S. real property.
What also may impact individual foreign sellers is that the withholding rate under FIRPTA has increased to 15% from 10% and takes effect after Feb. 16 (60 days after the enactment date). This does decrease the cash proceeds payable to the foreign seller. The new rules allow for a reduction of the 15% withholding rate, bringing it back to the prior 10%, if the sales price does not exceed $1,000,000 and the buyer intends to use the property as a residence. Witholding tax rate is not applicable if the value of the property is under $300,000 and the buyer intends to use as a residence.
Analysts have said the new reforms are a bit of a mixed bag. The withholding tax rate will impact the cash flow of the seller of property however the availability of a FIRPTA exemption for foreign tax-exempt entities could increase the demand for U.S. real property from these groups. In recent article, CoStar reported that the changes could generate an additional $20 billion to $30 billion in investment in U.S. commercial real estate.