Congress amended the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) in the Protecting Americans from Tax Hikes Act of 2015, signed into law on December 18, 2015. The changes affected some core features of FIRPTA including disclosure requirements and withholding percentages.
One of the major changes to FIRPTA was implemented to combat the influx of overseas investors into high-end real estate markets in the United States, specifically in major cities like New York, Los Angeles, Boston and Miami. An added disclosure requirement now requires foreign owners of U.S. real property to divulge their identities where as in the past they could hide their identities behind holding companies.
One of the other major changes to FIRPTA is that it now allows foreign investors to own up to 10% of a publically traded real estate company before triggering additional FIRPTA tax, up from the previous 5% allowed under the law before. However, it is important to note, the withholding tax rate on dispositions of real property interests in the United States by foreign investors has risen from 10% up to 15%. The threshold amount requiring the withholding is for a sale price of $300,000 or more.
Other changes to FIRPTA now allow for foreign pension and retirement funds to sell property and invest in U.S. real estate without any additional taxation under FIRPTA. These foreign pension and retirement funds will now be taxed equivalent to U.S. pension funds. This change, along with others, is expected to encourage inbound foreign investment by easing tax burdens on foreign investors. Overall, the changes are expected to increase foreign investment by $20-30 billion a year moving forward and encourage foreign investment by foreign investors currently facing economic and political turbulence and negative interest rates in other foreign jurisdictions.