Q. So the real estate industry is very excited about a proposal the President has made regarding changing FIRPTA, the Foreign Investment in Real Property Tax Act. First, what is it, and what’s the change?
A. This is a tax rule that was inserted into IRC in 1980– and was a big change back then. Very generally speaking, foreign investors were not previously taxed on their gains from selling US real estate unless it was “effectively connected to a US trade or business” they conducted. So the gains from passive investment weren’t taxed. FIRPTA changed that, and also imposed a 10% withholding tax on any payments to foreigners arising from the disposition of real property.
Q. And presumably that was very effective at diminishing foreign appetite for US real estate… not just the economics of the tax itself, but having to grapple with the IRS to get withheld dollars back.
A. Yes. And recall at the time there was a growing backlash to foreign investment anyway, so this served both political and economic goals. But anyway, these days, those foreign dollars are looking better, especially as they could be invested in infrastructure projects.
Q. So what is the proposed change, then?
A. The idea is to put foreign pension plans on the same footing as US pension plans regarding these investments– that is, no tax on the gains. It’s not clear yet exactly what gets included in the definition– for example, would sovreign wealth funds also be exempted? But it would not apply to all foreign money.
Q. And so the real estate industry thinks this is a big deal?
A. A very, very big deal. Large foreign investors love big portfolios of US real estate– its one of he safest asset class in the world, when you think about it, especially for really long term money. It could be a fantastic boost for PPPs to rebuild infrastructure, as the president hopes, but also for every other segment of the industry– residential housing, office and commercial, etc.
Q. And today, the FIRPTA rules really keep them out?
A. There are some very fancy ways to structure around FIRPTA in particular cases, but, definitely, its been a major roadblock to major pots of money.