House Ways and Means Committee Members Darin LaHood (R-IL) and Carol Miller (R-WV) recently called on Treasury Secretary Janet Yellen to withdraw a proposed IRS rule that would expand the reach of the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980. The policymakers’ request followed a letter by The Real Estate Roundtable and 14 other real estate trade organizations that urged congressional tax-writing committees to oppose the FIRPTA proposal. (Letter to Yellen, July 28 and Industry coalition letter, March 1)

Retroactive Rewrite for REITs

• Under current law, shareholders of domestically controlled REITs are not subject to FIRPTA, a statutory regime that subjects foreign investors to capital gains tax on their U.S. property investments.
  
• The proposed IRS Look-Through Rule would no longer treat a taxpaying U.S. C corporation that has ownership shares in a REIT as a U.S. person—if more than 25% of the owners of the C corporation are foreign. If enacted, the new rule would trigger FIRPTA capital gains, retroactively, on REITS and investment structures used for decades when planning real estate and infrastructure investments.

Congressional CRE Concerns

• Reps. LaHood and Miller asked Treasury and the IRS to reverse course and withdraw the proposed regulation, stating in their letter, “The proposed regulation’s retroactivity is severely burdensome and is already having a chilling effect on foreign investment, which has been a vital contributor to the economic health of the U.S. commercial real estate market. If Treasury decides to move forward with this proposal, it is imperative that the retroactivity provisions are removed.”
  
• The letter also noted the proposed change would limit access to capital at a time when the CRE market is showing signs of destabilization. The House taxwriters added, “We fear this proposal could worsen the commercial real estate outlook and harm the many Americans who rely on these crucial investments in their communities.”

Industry Response

• In March, The Roundtable and other industry trade organizations wrote to congressional tax policymakers, urging them to contact regulators about withdrawing the rule. (Roundtable Weekly, March 3)

Additionally, The Roundtable, Nareit, American Investment Council, Managed Funds Association, and ICSC submitted comments to Treasury in February in opposition to the proposed look-through rule. The organizations wrote that the regulation would “reverse decades of well-settled tax law, severely misconstrue the statute, and contradict Congressional intent.” (Letter to Treasury, Feb. 27)

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