Reduce the Tax On Foreign Investment In U.S. Real Estate
The Trump administration is starting to turn its attention toward re-opening and revitalizing the economy, with the President announcing the formation of a new taskforce dedicated to these goals.
While the health of Americans remains the top priority, the administration is right to also focus on kickstarting the once-roaring economy through tax and deregulatory policies that encourage investment and job creation.
One policy proposal that should be at the top of this list is rolling back the Foreign Investment in Real Property Act (FIRPTA), an outdated law that restricts foreign dollars in American real estate by imposing higher taxes on foreign investment in real estate and infrastructure than those on other asset classes like stocks and bonds.
And the best part – the administration does not need to wait for Congress – the Treasury Department can offer relief from FIRPTA immediately by withdrawing Section Two of Notice 2007-55.
Over the last several decades, FIRPTA has driven away much-needed dollars in real estate of all kinds, from multifamily housing, to commercial buildings, to various types of infrastructure including railroads, pipelines, and broadband.
FIRPTA alone was already a critical hindrance to foreign investment in infrastructure, but an arbitrary and un-checked bureaucratic power grab made it far worse. In 2007, FIRPTA was expanded to distributions made by a Real Estate Investment Trust (REIT). A REIT is a corporation that, much like a mutual fund, offers shares of a real estate investment portfolio without turning over control of the underlying property.
Under this Treasury Notice, foreign investors in a REIT are penalized with an additional 15% withholding tax. The IRS’s move broke with 30 years of precedent taxing sales of REITs like shares of stock, not an investment in real property—all without notice and without an opportunity for stakeholders to comment.
Rolling back FIRPTA will result in a much-needed influx of billions of new, debt-free financing for everything from new roads to multifamily housing. Prior to the COVID pandemic, foreign investment was responsible for hundreds of billions of dollars pouring into the U.S. economy.
FIRPTA reform can also be a way for the President to meet his priorities of encouraging innovation in infrastructure finance.
The President has been focused on clearing unnecessary bureaucratic hurdles and regulations to allow honest businesses to flourish. His infrastructure plan relies on money raised not from higher taxes or debt, but from private investments.
This could have significant economic benefits. Full repeal of FIRPTA could increase U.S. investment by up to $125 billion and create 147,000- 284,000 new jobs, according to a 2017 study by the Rosen Group. This increased economic activity also dwarves the budgetary impact of FIRPTA repeal – which was less than $250 million between 2009 and 2013.
Just withdrawing the IRS Notice should inject billions of dollars into our economy by encouraging foreign investment in U.S. based REITs.
FIRPTA reform has been and continues to be a bipartisan issue. Legislation repealing FIRPTA has been introduced by Reps. John Larson (D-CT) and Kenny Marchant (R-TX) and counts 11 Republicans and 11 Democrats as co-sponsors.
The fact is, there is no need for FIRPTA anymore. While it was first implemented in response to Cold War-era driven concerns that foreigners could purchase strategically significant real estate, these concerns are no longer relevant. The Committee on Foreign Investment in the United States (CFIUS) exists to vet national security implications of foreign investments, and was strengthened by the recently enacted Foreign Investment Risk Review Modernization Act, allowing CFIUS review of real estate transactions.
Best of all, President Trump does not need permission from Congress to fix FIRPTA now.
Members of the House and Senate led by Rep. Devin Nunes (R-CA) and former Senator Johnny Isakson (R-GA) noted in recent letters urging withdrawal of IRS Notice 2007-55 that the Administration has strong congressional and industry support as well as legal justification for jump-starting a new investment stream.
In their letters, Nunes and Isakson note that repealing the notice’s expansion of FIRPTA will “restore the intent of Congress with respect to the tax law governing liquidations, provide parity to investors, and increase direct foreign investment in U.S. commercial real estate and infrastructure in every corner of the nation.”
Real estate industry groups including the Real Estate Roundtable, Nareit, the National Multifamily Housing Council, and the National Apartment Association have all backed this argument.
Defeating COVID-19 is and should be priority number one, however getting people back to work and the economy back on track is a close second. To help achieve these goals, President Trump should repeal and roll back FIRPTA by having the Treasury department withdraw Section Two of Notice 2007-55.
Doing so will help regrow our economy, lift wages, and get America back to being one of the most competitive countries in the world.