FIRPTA HISTORY, RECENT REFORMS & REPEAL EFFORTS
During the American farm crisis more than thirty years ago, Congress passed legislation to discourage overseas investors from buying American cropland. FIRPTA imposed a 35% capital gains tax on international investors with an interest in any type of U.S. commercial property and some residential property too. This recently amended but still punitive tax remains a significant barrier to new investments that could help America grow given that no other asset class or industry is burdened by this negative tax treatment.
Proposals to reform and repeal FIRPTA are not new and enjoy widespread bipartisan support. Senator Malcolm Wallop (R-WY), originally introduced it 1980 to protect Wyoming farmland from being acquired by foreigners. He and others soon realized, the detrimental effect on the economy, later stating that “FIRPTA has grown into a gorilla which terrorizes foreign investors, treaties, and the free market, to the detriment of all but the tax technicians.” Senator Wallop himself supported a FIRPTA repeal bill in 1984 and also introduced legislation that would have repealed FIRPTA in 1985.
The Senate Finance Committee also approved full FIRPTA repeal in 1986, noting that the “FIRPTA rules…reduce aggregate demand for U.S. real property and, therefore, lower its price to the disadvantage of prospective U.S. sellers.” FIRPTA reforms also overwhelmingly passed the U.S. House of Representatives in 2010 by a 402-11 vote and received similarly strong bipartisan support in the Senate Finance Committee.
Over a nearly 3-year period, The Invest in America Coalition worked tirelessly with a bipartisan, influential group of legislators in the House and Senate including former House Ways & Means Committee Chairman (now Ranking Member) Kevin Brady (R-TX), former Reps. Pat Tibieri (R-OH), Joe Crowley (D-NY) and U.S. Senators Mike Enzi (R-WY), Bob Menendez (D-NJ), Maria Cantwell (D-WA) and Johnny Isakson (R-GA) to achieve long sought FIRPTA reforms.
These efforts led to the introduction of the Real Estate Investment and Jobs Act of 2015 (REIJA) that contained significant reforms to FIRPTA. The legislation secured 21 bipartisan cosponsors on the Senate Finance Committee and 35 co-sponsors on the Ways & Means Committee. Due in part to the Coalition’s intense legislative and grassroots efforts, The PATH Act of 2015 (‘The Act”) included two of REIJA’s long sought FIRPTA reform provisions:
- Exempting “qualified foreign pension funds” and entities wholly owned by such funds from FIRPTA equalizing the tax treatment of domestic and foreign pension funds.
- Expanding the FIRPTA exemption available to small foreign “portfolio investors.” Under prior law, foreign investors owning 5% or less of a publicly traded REIT were not subject FIRPTA. The Act increased this ownership threshold from 5 to 10% bringing the FIRPTA regime in line with the definition of a portfolio investor used in most U.S. tax treaties.
Independent industry experts have confirm that these long-sought though relatively modest reforms generated tens of billions of dollars in new foreign investment in the U.S. There are already very encouraging signs. Foreign capital investment into Charlotte, NC for 2016 was up 29.8%. Markets such as Nashville and Memphis also had increases of 20.8% and 13.4% respectively according to a 2016 study by Newmark Grubb Knight Frank Research. A similar 2016 survey taken among AFIRE members revealed that most of this new foreign investment went into U.S. industrial properties and multifamily sectors, followed by commercial office buildings.
To build on our FIRPTA reform successes included in the 2015 PATH Act, the Coalition continued to pursue a dual legislative and administrative advocacy strategy. IAC actively worked with our bipartisan Congressional allies to achieve additional progress including formal introduction of stand-alone full repeal legislation while continuing efforts on the administrative rule-marking front related to withdrawal of Section Two of IRS Notice 2007-55 by the Treasury Department
IAC was instrumental in organizing a joint letter in mid 2017 from leading real estate industry associations formally requesting full FIRPTA repeal. The Hill published an op-ed calling for full FIRPTA repeal, authored by former Westfield CEO & past IAC Chair Peter Lowy.
IAC also provided key support to commission an economic impact analysis conducted by UC-Berkeley Economics Professor Ken Rosen which estimated that full FIRPTA repeal would generate an initial increase in international investment in commercial real estate and infrastructure of between $65 billion and $125 billion and creation of 280K+ jobs. Additionally, the $1.3 trillion Consolidated Appropriations Act of 2018 (“Omnibus Bill”), enacted in early 2018 contained several very favorable FIRPTA clarifications from the Tax Technical Corrections Act of 2016 (H.R. 6439) to resolve ambiguities to the PATH Act reforms most notably the exemption definitions for qualified foreign pension funds (QFPFs).
More recently, IAC coordinated the comprehensive political and policy efforts that culminated in September 6, 2018 formal introduction by Congressmen Kenny Marchant (R-TX) and former Rep. Joe Crowley (D-NY) of H.R. 6726, the Invest in America Act, which would repeal FIRPTA in its entirety. Prior to the end of 115th Congress, the bill received support of numerous early original co-sponsors.
IAC also made laudable progress in our ongoing administrative rulemaking efforts to advocate for withdrawal of Section Two of IRS Notice 2007-55 by the Treasury Department. The Coalition organized a bi-partisan letter to Secretary Mnuchin from 34 Members of the Ways and Means Committee requesting the Notice be withdrawn. Thereafter, we convened productive meetings for IAC members and allied real estate industry leaders with Deputy Treasury Secretary for Tax Policy David Kautter and his staff.
IAC is pleased to report that Reps. John Larson (D-CT) and Kenny Marchant (R-TX) formally re-introduced The Invest in America Act (H.R. 2210, Full FIRPTA Repeal) on April 10, 2019. They were joined by a strong bipartisan group of original Ways & Means Committee co-sponsors including Reps. Earl Blumenauer, (D-OR), Danny Davis, (D-IL), George Holding, (R-NC), Rep. Steve Horsford (D-NV), Rep. Ron Kind, (D-WI), Rep. Ray LaHood, (R-IL), Rep. Bill Pascrell, (D-NJ), Rep. Jason Smith, (R-MO), Rep. Thomas Suozzi (D-NY) and Jackie Walorski (R-IN).
This robust level of bipartisan support from such a geographically diverse (urban, suburban rural districts) group comprising some of the most progressive and conservative members of the Ways & Means Committee is unusual at the beginning of a new Congress and demonstrates important initial momentum for our efforts. We are also encouraged that numerous Committee members have signaled their intention to become co-sponsors in the coming weeks.