Foreign Investment in Real Property Tax Act (FIRPTA) Rule Updates

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In 1980, Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA) to tax foreigners’ gains on the income they earn from, and then the sale of, U.S. real estate and other real property. FIRPTA imposes significant costs on foreign investors in U.S. real estate, thereby serving as a significant barrier to such investment.

As part of tax legislation enacted in late 2015, Congress reduced FIRPTA’s negative impact on U.S. real estate investment by increasing from five percent to ten percent the ownership stake that a foreign investor may take in a U.S. publicly traded REIT without triggering FIRPTA. Congress also removed a tax penalty FIRPTA imposed on foreign pension funds investing in U.S. real estate. While these provisions represent real progress, repealing FIRPTA could unlock billions in foreign capital that could help to refinance real estate loans and drive new investment while creating tens of thousands of new jobs.

Read on for the latest legislative, regulatory and industry actions related to this topic.

March 6, 2023

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NMHC Pushes Back on Proposed FIRPTA Rule

Following the December 2022 release of the proposed Foreign Investment in Real Property Tax Act (FIRPTA) rule (detailed below), NMHC and NAA sent a letter to IRS opposing the rule and also joined a coalition of real estate partners in calling on Congress to urge the Treasury Department and IRS to withdraw said proposal.

What This Means: Given the rule’s potential impact on the industry, it was imperative NMHC weigh in with Congress to request they convey the following concerns to the Treasury Secretary and IRS Commissioner:

It could disrupt real estate’s access to capital at a time of rising rates and economic vulnerability—putting property values, jobs, and communities at risk.
The proposal exceeds Treasury’s authority and circumvents the legislative process by overriding decades of well-settled, existing law and contradicting clear statements of congressional intent.
By applying retroactively—and in certain ways, applying before it is even finalized—the rule is grossly unfair to current real estate investors who played by the rules and sends a damaging message to potential future investors that U.S tax law is neither stable nor predictable.

Why This Matters: If finalized, the rule could disrupt real estate’s access to capital, particularly during a period rising interest rates. Additionally, because the proposed rule would be retroactively applied, it would impose FIRPTA tax on prior investments upon sale.

What’s Next: In addition to asking lawmakers to weigh in with Treasury and the IRS, NMHC and NAA plan to provide comments to Treasury as part of the rulemaking process.

Read our full comments >>>

Jan 3, 2023

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Treasury & IRS Issue Two FIRPTA Rules that Could Negatively Impact Investment in Industry

The Treasury Department and IRS issued two Foreign Investment in Real Property Tax Act’s (FIRPTA’s) regulations that will impact the multifamily industry:

On December 28, 2022, they issued final regulations regarding the tax treatment of gains and losses of qualified foreign pension funds attributable to investments in U.S. real estate.
On December 29, 2022, they proposed regulations regarding the tax treatment of qualified foreign pension funds for the purpose of the exemption from tax available to foreign governments.

What This Means: As part of tax legislation enacted in late 2015, Congress reduced the FIRPTA’s negative impact on U.S. real estate investment by, among other provisions, removing a tax penalty FIRPTA imposed on foreign pension funds investing in U.S. real estate.

Why This Matters: The final regulations “adopt a broad definition of retirement and pension benefits to ensure that a wide variety of pension funds and foreign laws are accommodated.” They also include rules pertaining to the certification that “a qualified foreign pension fund is not subject to withholding on certain dispositions of, and distributions with respect to, certain interests in United States real property.”

The proposed rules would impose a look-through rule for determining whether a qualified investment entity is domestically controlled, which could potentially disrupt our industry’s access to capital.

Industry Impact: In 1980, Congress passed FIRPTA to tax foreigners’ gains on the income they earn from, and then the sale of, U.S. real estate and other real property. FIRPTA imposes significant costs on foreign investors in U.S. real estate, thereby serving as a significant barrier to such investment.

NMHC’s Viewpoint: NMHC has long-believed that Congress should repeal FIRPTA to promote foreign investment in the U.S. multifamily industry, helping to meet the growing demand for rental housing. Further, we believe that the proposed look-through rule would only add to the current market pressure, restricting access to an important source of capital by making U.S. real estate a less attractive investment for foreign investors—further exacerbating supply constraints and affordability challenges.

What’s Next: NMHC is working with a coalition of research trade associations to push back on the proposed rule and educate lawmakers on its potentially harmful implications.

Access the final regulations: https://public-inspection.federalregister.gov/2022-27978.pdf

Access the proposed regulations: https://public-inspection.federalregister.gov/2022-27971.pdf

Matthew Berger mberger@nmhc.org