Tax changes in US planned to ease financial burden on foreign commercial property investors

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Written by Ray Clancy

Wednesday, 28 April 2010 12:00

A plan to lower or get rid of US taxes currently imposed on foreign investors in the commercial real estate market is being considered.

But it is feared that Tax breaks may not be enough of a sweetener to bring foreign buyers back into the floundering US property market, where falling rents, rising vacancies, a scarcity of debt financing and lack of property for sale have acted as deterrents.

The Real Estate Revitalization Act of 2010 is designed to stir demand by foreigners and in turn lift prices and encourage even more buying by alleviating the US tax burden imposed upon foreign sellers. The number of commercial property deals fell by 55% in 2009 after falling 62% the previous year.

Currently the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) imposes US capital gains taxes on foreign sellers of US real estate but such taxes are not imposed on foreigners who sell US stocks and bonds.

FIRPTA, sponsored by then Wyoming Senator Malcolm Wallop, was a response to a wave of German investors who bought up ranch property in the Western US. Prior to that, when a foreigner sold US property, he generally was not taxed where the real estate was located, but rather was taxed in his home country.

But FIRPTA did not inhibit foreign owners from buying property during the U.S. commercial real estate boom of 2004 to 2007. They used complicated legal structures to mitigate the taxes.

Although the 2010 legislation seeks to make things a bit easier for foreign sellers, it would not change taxes on direct ownership, a popular form of investment. It chiefly affects the taxes on selling shares of companies that own the property.

If a foreigner owns shares of a company in which real estate comprises more than 50 percent of its assets, that investor would not be subject to US capital gains taxes upon the sale of that stock.

Under the Real Estate Revitalization Act, the sale of property by a Real Estate Investment Trust (REIT) would no longer be treated as capital gains for a foreign investor but as ordinary dividends. Although those face a 30% dividend distribution tax, many countries have treaties with the US that reduce or eliminate that tax.

The new bill also would treat the sale of stocks by foreigners of a REIT that is less than half foreign owned as a stock sale and not subject to US taxes.

The Real Estate Roundtable, an industry trade group, said it hopes the changes would lure about $100 billion sitting on the sidelines back into the US commercial property market.

‘That combined with even 50 percent debt financing would bring enormous purchases and thereby stabilize what have been falling values of US commercial real estate,’ said Robert Schachat, vice chairman of the Real Estate Round Table Tax Policy Advisory Committee.