US lifts foreign pension fund RE tax

Foreign investors eyeing US opportunities can now deploy capital under a less restrictive tax code, a change lauded by the industry.

Congress repealed the Foreign Investment in Real Property Tax Act (FIRPTA) on Friday as part of a larger tax code and spending bill, and President Barack Obama signed the legislation into law the same day.

FIRPTA, first passed in 1980 over concerns about foreign investors buying US farmland, has been updated with concessions for investors in real estate investment trusts. The current legislation also now allows foreign pension funds to invest in US real estate without incurring extra tax liability, removing the capital gains tax that kept some overseas investors out of the US.

Under the old rules, foreign investors had to pay 10 percent of the gross proceeds of US real estate sales on top of federal, state and local taxes. Now, foreign pension funds will be taxed at the same rate as their US counterparts when selling domestic interests, an exemption that applies to both direct investments and investments through partnerships and private equity funds.

The new version of the tax code has some stipulations about the types of pension funds that qualify, which may still exempt some foreign systems. The pension plan cannot have one participant or entity with a stake in more than five percent of its assets; the system must be subject to government regulation and reporting; and it must be taxed in its jurisdiction.

The legislative rollback is predicted to have positive effects on incoming capital flows to the US, according to industry groups. In a 2014 survey by the Association of Foreign Investors in Real Estate, 76 percent of foreign institutional real estate investors said that FIRPTA relief would have a major or positive impact on their decision to invest in the US. Supporters say the repeal removes the disadvantages of investing in US real estate and helps the domestic market stay competitive with foreign markets.

The Real Estate Roundtable, a group that represents both private and public developers, was one organization that lobbied for the repeal. The group estimates the foreign pension fund tax exemption will bring in about $2 billion in additional revenue over the next decade.

“By breaking down outdated tax barriers to inbound investment, the FIRPTA relief will help mobilize private capital for real estate and infrastructure projects, such as roads and bridges, while driving growth in construction and related jobs,” said Jeffrey DeBoer, Real Estate Roundtable’s chief executive officer, in a statement.

FIRPTA was also modified to lighten taxation on shareholders of publicly traded REITs. Now, investors will be taxed if they own more than 10 percent of the entity’s stock, up from 5 percent.

The combination of the REIT tax exemption and foreign pension fund change is expected to generate another $20 billion to $30 billion in investment in US commercial real estate in 2016, said Kenneth Rosen, the chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, in the New York Times.