U.S. Real Estate Beckons to Foreign Investors in Wake of FIRPTA Revisions

By:
Alicea Castellanos, CPA, TEP, NP and Jack R. Brister, TEP
Published Date:
Jul 1, 2016

Changes to U.S. tax rules that were signed into law in December have important implications for foreign entities seeking to invest in the U.S. real estate market. This includes both additional disclosure requirements and provisions that may increase the tax efficiency of certain assets.

When Washington changed the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), it was in part to provide a measure of oversight - namely, that foreign owners of U.S. real property would have to divulge their identities. That was enacted in response to an influx of overseas investors into the American real estate market, particularly high-end properties in major cities like New York, Los Angeles, Boston, and Miami.

That onrush was precipitated by a number of factors. First, the United States is a stable democracy with a strong rule of law and economy. That makes it an attractive locale for overseas investors looking for secure places to park their capital. Tangible assets such as real property can provide a way to participate in this economy and, depending on broad market conditions, may offer greater long-term potential than, say, low-yielding debt, domestic equity, or foreign currency bonds.

Despite this added reporting requirement, most of the new changes to FIRPTA are designed to encourage greater inbound foreign investment. For example, the rules make ownership of U.S. real estate by foreign-controlled pension funds cheaper by treating foreign funds the same as their U.S. counterparts, thus eliminating an additional tax burden that foreign funds had faced.  

In addition, the new rules allow foreign investors to hold larger percentages of REITs, raising the threshold from 5% to 10% before triggering FIRPTA liability. Finally, for those still subject to FIRPTA, the new rules also increase the withholding tax rate on dispositions of real property interests in the United States by foreign investors from 10% to 15%.

Taken as a whole, these changes could be welcome for foreign investors in jurisdictions that are facing economic and political turbulence, such as in Europe - where zero yields and negative interest rates have investors looking for capital preservation options - or China, where economic growth has slowed over the past few years.   

The FIRPTA rules are themselves complex, and the added regulations and their applications only add to the complexity. While the IRS may provide additional clarifications, foreign persons who are seeking to make an investment in U.S. real property or who already have U.S. real property investments should seek appropriate tax, financial, and legal counsel to conduct a detailed review and analysis of their current and anticipated investments in U.S. real property to determine how these changes might affect their individual situations.

This article originally appeared in the March 2016 issue of The International Wealth Tax Advisor. Copyright, International Wealth Tax Advisors LLC, 2016. Reprinted with permission.


 Alicea Castellanos, CPA, TEP, NP, has more than 15 years of experience. She specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures, which include non-U.S. trusts, estates, and foundations that have a U.S. connection and executives living and working abroad. Alicea also specializes in non-U.S. persons investing in U.S. real property and other U.S. assets, pre-immigration planning, U.S. expatriation matters, U.S. persons in receipt of gifts and inheritances from non-U.S. persons, non-U.S. account and asset reporting, offshore voluntary disclosures, FATCA registration, and non-U.S. companies seeking to do business in the United States. Alicea has been published and has spoken at numerous events on U.S. cross border tax matters. She can be reached at acastellanos@iwtas.com.

 Jack R. Brister, TEP, has more than 25 years of experience. He specializes in U.S. tax planning and compliance for non-U.S. families with international wealth and asset protection structures, which include non-U.S. trusts, estates and civil law foundations that have a U.S. connection, and non-U.S. companies seeking to do business in the United States. Jack also specializes in non-U.S. persons investing in U.S. real property and other U.S. assets, pre-immigration planning, U.S. expatriation matters, U.S. persons in receipt of gifts and inheritances from non-U.S. persons, non-U.S. account and asset reporting, offshore voluntary disclosures, FATCA registration and compliance (W-8BEN-E and Form 8966) and executives working and living abroad. He can be reached at jbrister@iwtas.com.

 
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