You might not think much about the Foreign Investment in Real Estate Property Tax Act. But Tom McNearney, chief investment officer with Transwestern, has. And his thoughts? If Congress repealed this tax, it could send billions of additional foreign investment dollars into U.S. commercial real estate.
And all that extra money could provide quite the boost to an already strong U.S. commercial real estate market.
Foreign investors already consider commercial real estate in the United States to be a favored investment type. This isn’t surprising: Many overseas investors see economic turmoil in their own countries. They want to invest their dollars in asset classes that are stable.
U.S. office, multifamily and industrial properties fit this description.
McNearney, though, says that the Foreign Investment in Real Property Tax Act – better known as FIRPTA – is preventing even more foreign dollars from flowing into commercial assets here.
Congress passed FIRPTA in 1980. Under the act, foreign investors are taxed on the gains they realize when selling U.S. real estate. They are also taxed on any income, such as rent, they make on U.S. real estate. Congress passed the act because members were concerned that foreign investors weren’t paying any taxes when making big profits off U.S. commercial real estate.
Under this act, foreign investors are required withhold 30 percent of the gross rental income they make on U.S. real estate.
The act also states that when a buyer purchases U.S. real estate from a foreign seller, the buyer must ensure that 10 percent to 15 percent of the purchase price is withheld. The IRS requires the buyer to take on this burden to make sure that sellers,
after disposing of U.S. properties, don’t skip out on their taxes because they might no longer have a connection to the United States.
The withholding amount had traditionally been 10 percent. But in 2015, that rate jumped to 15 percent, but only when buyers spend more than $1 million to purchae a property from a foreign buyer.
“In a year when tax reform is on the menu, lawmakers should consider repealing FIRPTA to unlock billions of dollars for potential investment in U.S. real estate,” McNearney said in a written statement. “This antiquated double standard is a disincentive to invest that unfairly burdens the property sector. Repealing FIRPTA would add tremendous liquidity that could offset slowing institutional allocations to real estate.”
McNearney’s call for eliminating FIRPTA represents just one portion of the most recent briefing report from Transwestern. The report is filled with other interesting CRE facts, including:
– Credit Suisse is forecasting 8,640 retail store closings in the United States by the end of the year.
– Distressed commercial real estate debt holdings at the top 500 banks are back to normal levels at $8.7 billion, down 14.5 percent from $10.2 billion in 2015.
– Home sales to first-time buyers rose to 424,000 in the first quarter of 2017, up 11 percent from a year earlier. These sales represented 38 percent of all single-family sales.
– CMBS volume of about $30 billion in the first half of 2017 reflected a slow first quarter.