Tax Reforms May Inject Foreign Capital Into U.S. Real Estate Markets

PETER CAPACCHIONE — On July 31st, Reps. Kevin Brady (R-TX) and Joseph Crowley (D-NY) proposed the Real Estate Investment and Jobs Act of 2013 to Congress.  This proposed act would implement changes to the 1980 Foreign Investment in Real Property Tax Act (“FIRPTA”) in a manner that could potentially incentivize foreign investors to double the amount of money that they already invest in real estate investment trusts, or REITs.

Investopedia.com defines a Real Estate Investment Trust (“REIT”) as a “security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.”  Essentially, a REIT is like a mutual fund, only the pooled investments are used to purchase or develop real properties; profits usually come from rental income from the trust’s collectively owned properties.

In its current form, the 1980 tax act provides a tax exemption to foreign investors holding no more than five percent of a REIT’s total stock.  Foreign investors going over this five percent cap will be subject to as much as a 54 percent tax whenever they liquidate their shares in the REIT or receive capital gain distributions from the trust.  The proposed reform act would raise the tax exemption cap from five percent to ten percent.

During a teleconference with the act’s two sponsors and some other notable industry experts, Jeffrey DeBoer explained, “We think this bill will attract capital and financing for infrastructure.  We think it will create jobs . . . People around the world have looked for a place to invest . . . We’re losing out on capital that wants to come here.”  DeBoer is the President and CEO of the Real Estate Roundtable, a collection of leaders from the United States’ top real estate firms and trade associations that address public policy regarding real estate and the economy.

The proposed changes to FIRPTA and its related sections of the tax code could allow tax-weary investors from abroad to double the amount of capital that they currently invest in trusts, which purchase and develop real estate throughout the country.  New property development will not only generate more rental income, but also has to potential to make individual real estate markets grow in desirability, while also creating new jobs.

While this all seems like a tremendously valuable reform, some will likely be weary of more foreign investment within the United States.  This should come as no surprise, especially with many Americans feeling like investors from China and elsewhere seem to be encroaching upon the US through the use of their pocketbooks.  Sure, this reform will undoubtedly increase the amount of capital and property that foreigners have their hands on, but in our delicate state of recovery, Americans may want to be thankful for any money invested into our economy, regardless of that capital’s nationality.

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