Tag: Capital Gains

View from the CEO: Priorities for the CRE Industry in 2025

Posted on by Abigail Grenadier

With control over the White House and both chambers of Congress decided, attention has turned to how President-elect Donald Trump’s second term will affect the commercial real estate industry.

Looking Ahead

  • As Roundtable President & CEO Jeff DeBoer noted to BisNow last week, the new administration represents a chance to strengthen policymakers’ understanding of the critical role CRE plays in the economy. (BisNow, Nov. 12)
  • “Anytime that there’s a turning of the page, there’s an opportunity to emphasize new issues, or to bring priority to older issues that maybe have been pushed out by previous leaders,” DeBoer told BisNow. DeBoer also highlighted key policy priorities for commercial real estate to move forward in the coming administration, including housing, tax, capital markets, and energy.

Housing Policy

  • Interagency task force: The Roundtable is calling for a federal task force focused on expanding the housing supply, particularly affordable housing. This task force would coordinate efforts across agencies to streamline building processes and reduce regulatory barriers, incentivizing new development across the U.S.
  • Property conversions: The administration should support federal incentives for (such as low interest loans) converting obsolete office buildings into residential housing. Modeled after tax credits for historic preservation, bipartisan legislation like the Revitalizing Downtowns and Main Streets Act could help relieve the national housing shortage. (Roundtable Weekly, July 12)
  • Tariff concerns: Proposed tariffs on materials like lumber, steel, concrete, glass and appliances could impact housing supply: “By putting tariffs on housing materials, you will be indirectly increasing costs for buyers and renters and making it more difficult to solve this housing crisis,” said DeBoer.

Tax Policy

  • With key provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) expiring soon, tax legislation will likely be central to President-elect Trump’s first 100 days.
  • Capital gains: Long-standing elements of the tax code, including the reduced rate for capital gains, the ability to reinvest through like-kind exchanges, and step-up in basis of assets at death, are critical for real estate businesses and encourage productive investment and economic growth. RER will continue to advocate that these provisions be maintained.
  • Section 199A: The qualified business income deduction for pass-through businesses, known as Section 199A, ensures that small businesses can compete on a level playing field with public corporations. RER supports extending the deduction, which is currently set to expire.
  • Foreign investment: Restrictions on foreign investment discourage capital formation and could hinder growth in real estate at a time when increasing the supply and availability of capital is critical to the industry’s recovery. Policymakers should avoid imposing additional restrictions or tax burdens on foreign investors, and consider repealing or reforming the Foreign Investment in Real Property Tax Act (FIRPTA).

Capital Markets

  • Strengthening capital flows in real estate is a top priority, as lending and credit availability have remained relatively weak since the pandemic and are only recently starting to see improvement.
  • Interest rates: Policymakers should carefully consider the inflationary effects of fiscal policies to maintain a favorable interest rate environment. Avoiding increased capital requirements, such as Basel III Endgame proposal, is also necessary to prevent hindering growth.

Energy Policy

  • With the rise of data centers, AI and other energy-intensive sectors, addressing energy capacity and permitting is a critical bipartisan need and “very important” to RER’s agenda, as DeBoer noted.

RER is committed to working proactively and productively with President-elect Trump and the 119th Congress to support the needs of the economy and commercial real estate industry.

CRE Industry Advocates for Tax Relief to Support Recovery and Stability

Posted on by Abigail Grenadier

As the U.S. commercial real estate sector enters a critical recovery period, industry leaders are urging policymakers to retain key tax policies from the Tax Cuts and Jobs Act of 2017 (TCJA), many of which expire at the end of 2025. (Reuters, Oct. 28)

Tax Landscape

  • The outcome of the November presidential election will play a critical role in shaping year-end tax bill discussions.
  • If either candidate secures the presidency and achieves unified control of Congress, they may urge their congressional allies to delay any tax negotiations until 2025.
  • The Roundtable is preparing for potential tax legislation in the lame-duck session, though action may be delayed until next year’s debate when major provisions in the TCJA expire. (Roundtable Weekly, Oct. 25)
  • In early October, RER submitted comments to Capitol Hill on the pending expiration of the TCJA and ways in which tax policy can support long-term investment, economic stability, and the creation of affordable housing. (Roundtable Weekly, Oct. 4)

Industry Advocacy

  • Speaking to Reuters, Real Estate Roundtable President and CEO Jeffrey DeBoer noted the difficult economic backdrop for real estate as the tax debate has gathered steam, “Over the last 18 months … operating costs have … risen dramatically at the same time the availability of capital and credit have diminished…. All of that creates stress and challenges in the CRE marketplace.” (Reuters, Oct. 28)
  • With the tax reform debate heating up in Washington, maintaining sound tax rules that both reflect the economics of real estate transactions and encourage capital formation is a priority for the CRE industry.
  • “Depreciation deductions and interest expense deductions. They’re not tax breaks. They’re the cost of doing business,” said Ryan McCormick (SVP & Counsel, RER) while discussing housing policy in Politico’s Morning Tax.  (Politico, Oct. 28)
  • RER Member Hessam Nadji (President & CEO, Marcus & Millichap) appeared on CNBC International Squawk Box this week and spoke on the upcoming elections, international investor re-engagement with U.S. CRE, zoning and private-public partnerships, and the impact of government policies, particularly regarding housing.

RER Tax Priorities

Roundtable tax priorities heading into 2025 include:

  • Capital formation and capital gains: Preserving key elements of the tax code (e.g., capital gains preference, like-kind exchanges, step-up in basis at death) that encourage productive real estate investment, risk-taking, and growth.
  • Strong partnership, pass–through, and entity choice rules: Extending tax provisions like section 199A that allow pass-through businesses to compete on a level playing field with public corporations.  
  • Affordable housing and community development incentives: Advocating for tax incentives tied to affordable housing, energy efficiency, Opportunity Zones, and commercial-to-residential conversions.
  • Removing barriers to job-creating foreign investment:  The tax system should avoid discriminatory policies that discourage job-creating foreign investment in US real estate and infrastructure.  

Tax Bill Negotiators to Watch

  • Sen. Mike Crapo (R-ID): If Republicans take control of the Senate, Crapo is poised to lead the Senate Finance Committee in 2025. Given his influence over Senate Republicans, many of whom followed his opposition to this year’s bipartisan tax bill, Crapo’s stance on a year-end tax deal will be pivotal.
  • Sen. Ron Wyden (D-OR): Wyden has shown a willingness to strike deals, as evidenced by his work with Rep. Smith on this year’s agreement. He might be eager to pass as much of that legislation as possible during the lame-duck session.
  • Rep. Jason Smith (R-MO): As chair of the House Ways and Means Committee, Smith’s perspective will be highly influential in the lame-duck session, with Republicans still holding the House majority.

The Roundtable is committed to working with lawmakers to ensure the U.S. maintains a competitive tax code that encourages capital formation, rewards entrepreneurial risk-taking, and supports critical policy objectives, including accessible and affordable housing and safe and healthy communities.

The Roundtable Shares 2025 Tax Legislative Agenda with Lawmakers

Posted on by Abigail Grenadier

Responding to a request for input from the chairs of the House Ways and Means Committee and Ways and Means Tax Policy Subcommittee, The Real Estate Roundtable submitted comments on the pending expiration of the Tax Cuts and Jobs Act of 2017 and ways in which tax policy can support long-term investment, economic stability, and the creation of affordable housing. (Letter, Oct. 2)

Roundtable Recommendations

The letter from Roundtable President and CEO Jeffrey DeBoer urges lawmakers to ensure that any major tax legislation in 2025 retain or include:

  • The reduced tax rate on long-term capital gains. The capital gains rate is critical for driving long-term real estate investment and fostering job creation. Raising capital gains rates, taxing unrealized gains, or double-taxing gains at death would deter entrepreneurship, increase costs, and reduce economic mobility.
  • Tax fairness for partnerships and pass-through entities. Half of the nation’s tax partnerships are real estate-related, making these provisions vital to the industry’s success.  Section 199A, which provides a 20% deduction on pass-through business income (including REIT dividend income), allows privately held businesses to compete on a level playing field with large corporations.
  • Like-kind exchanges. Section 1031 allows for the deferral of capital gains through real estate exchanges and helps gets languishing properties into the hands of new owners who will invest in, and improve, them.  Retaining section 1031 is vital to promoting reinvestment in communities, creating opportunities for minority and small business owners, and improving struggling properties.
  • Tax rules that encourage, rather than deter, foreign investment in U.S. real estate. Targeted changes to the outdated and discriminatory Foreign Investment in Real Property Tax Act (FIRPTA) could unlock capital for large-scale real estate and infrastructure projects that create jobs and spur economic development.
  • Incentives for affordable housing, energy efficiency, and community revitalization. The Roundtable supports expanding the low-income housing tax credit (LIHTC), improving the real estate-related clean energy tax provisions in the Inflation Reduction Act, and introducing new incentives for the conversion of obsolete commercial buildings into affordable housing. The letter also calls for a long-term extension of Opportunity Zone (OZ) tax incentives and preserving carried interest tax rules that recognize and reward sweat equity with capital gains treatment.

The Roundtable is committed to working with lawmakers to ensure the U.S. maintains a competitive tax code that encourages capital formation, rewards entrepreneurial risk-taking, and supports critical policy objectives, including accessible and affordable housing and safe and healthy communities.

President Biden’s FY2025 Budget Calls for $4.9 Trillion in Tax Increases

Posted on by Abigail Grenadier

The Biden administration this week released its $7.3 trillion FY2025 budget request, which includes $4.9 trillion in tax increases and several tax proposals impacting capital gains. The Treasury Department also released its “Green Book,” which provides detailed descriptions of the budget’s tax proposals and associated revenue estimates. (White House budget and Treasury news release, March 11)

Capital Gains Focus

  • The White House’s annual budget represents the economic policy agenda of the Biden administration. While it is a wish list with no immediate impact, it sets a marker for upcoming debates on spending and fiscal priorities in Congress and throughout the upcoming election. This week’s budget document includes many of the same tax proposals in President Biden’s previous budgets and policies outlined during his State of the Union address last week. (Roundtable Weekly, March 8 and White House Fact Sheet on the Budget, March 11)
  • The FY2025 Green Book repeats the administration’s proposal to tax capital gains at ordinary income rates—nearly doubling the capital gains rate from 20% to 39.6%.  The budget would also increase the net investment income tax from 3.8% to 5% and extend the tax to all pass-through business income, effectively ending the exception for real estate professionals active in the business. As a result, the top combined tax rate on real estate capital gains and rental income would rise to 44.6%.
  • Other tax proposals in the budget would create a 25% minimum tax on the unrealized gains and income of individuals with more than $100 million in wealth, recapture depreciation deductions at ordinary income rates when real estate is sold, and raise the top personal income tax rate from 37% to 39.6% for those making more than $400,000. The president also proposes to raise the corporate tax rate from 21% to 28%. (The Hill, March 13)
  • Biden’s 2025 budget would largely eliminate the deferral of capital gain through like-kind exchanges (section 1031) and tax all carried interest as ordinary income. (White House Fact Sheet, March 11)

Tax Debates Begin

  • Treasury Secretary Janet Yellen will testify on the administration’s budget and tax proposals before the Senate Finance Committee March 21 and during an upcoming House Ways and Means Committee hearing.
  • The Green Book will serve as a reference for congressional Democrats who develop large-scale tax legislation for the next Congress in anticipation of the expiration of 2017 Tax Cuts and Jobs Act provisions at the end of 2025.
  • As the FY2025 budget proposals spark a wide-ranging tax debate, a current $79 billion tax package—passed by the House and supported by The Roundtable—is pending in the Senate. (CQ News | Politico Pro | Tax Notes, March 15). Additional proposals in the budget impact housing policy—see story below.

Joint Employer Rule Struck

  • Separately, a federal court on March 8 blocked the National Labor Relations Board’s (NLRB) final joint-employment standard rule. The decision from the U.S. District Court for the Eastern District of Texas addressed whether the expansive definition has the potential to expose broad swaths of employers to liability for labor law violations committed by contractors or franchisees. The court vacated the NLRB rule, stating the joint-employment standard interpretation is too broad. (Politico Weekly Shift, March 11, 2024 and Roundtable Weekly, Jan. 17, 2020)

As an appeal from NLRB is expected, employers should continue to comply with the current joint-employer rule adopted in 2020. (JD Supra, March 14)

#  #  #

House Ways and Means Members Call on Treasury to Withdraw FIRPTA Regulatory Proposal

Posted on by Trey Jackson

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

buildings cityscape
  • 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

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)

#  #  #

President’s Budget Reignites Congressional Debate on Taxing Assets at Death

Posted on by Trey Jackson

Capitol at sunset

Congressional policymakers this week focused on two tax policy proposals included in President Biden’s FY2024 budget that could adversely affect family-owned real estate businesses—eliminating the step-up in the basis of assets at death and imposing new restrictions on the use of grantor retained annuity trusts (GRATs) and grantor trusts. (Roundtable Weekly, March 10 and Treasury’s “Green Book” description of the President’s revenue proposals, March 9)

Step-up in Basis

  • The White House budget plan once again includes a proposal to eliminate the step-up in basis of real estate and other assets at death.  The budget would replace step-up with a new policy that subjects the decedent’s appreciated assets to capital gains tax at death, in addition to potential estate tax liability.  The tax on unrealized, built-in gains would apply even when the decedent and the heir have no intention or desire to sell the property.
  • On Tuesday, a bipartisan group of Representatives led by Rep. Tracey Mann (R-KS) and Jim Costa (D-CA) introduced House Resolution 237 expressing support for retaining stepped-up basis.  Cosponsored by 63 members of Congress (4 Dem., 58 Rep.), the resolution notes that stepped-up basis is “a crucial component of many family farms and small business succession plans.” (BGov and Rep. Mann news release, March 21)
  • In 2021, a study by EY commissioned by the Family Business Estate Tax Coalition with support from The Real Estate Roundtable found that repealing stepped-up basis and taxing unrealized gains at death would result in reduced job growth, lower wages, and a reduction in GDP of roughly $10 billion per-year.

Grantor Trusts

FY2023 Budget Cover

  • The President’s budget again proposes major tax increases on grantor retained annuity trusts (GRATs) and grantor trusts that the administration estimates would raise $65 billion over 10 years.
  • GRATs and grantor trusts are frequently used to facilitate the continuation of family-owned businesses from one generation to the next, particularly in capital-intensive industries like real estate that can involve significantly appreciated assets.
  • On Monday, four Democratic Senators—Elizabeth Warren (MA), Bernie Sanders (VT), Chris Van Hollen (MD), and Sheldon Whitehouse (RI)—wrote to Treasury Secretary Yellen urging her to use her regulatory authority to “limit the ultra-wealthy’s abuse of trusts to avoid paying taxes.” The letter includes eight specific recommendations, including the reissuance of family limited partnership regulations that address the use of valuation discounts. (Tax Notes, March 22)
  • In 2017, The Real Estate Roundtable and others commissioned a study by Dr. Robert Shapiro, former Undersecretary of Commerce for Economic Affairs, analyzing the economic impact of a proposed regulation to limit valuation discounts for family businesses. The study concluded the limits could cost 106,000 jobs and $150 billion in GDP over 10 years. The study followed formal Roundtable written comments submitted in 2016—and oral testimony highly critical of the proposal by Roundtable Tax Policy Advisory Committee Member Stef Tucker.

The White House FY2024 budget revenue proposals will be discussed during the Roundtable’s Spring Meeting on April 24-25 in Washington, DC (Roundtable-level members only.)

#  #  # 

Congressional Tax Writers Focus on Policies to Increase Supply of Affordable Housing

Posted on by Trey Jackson

NMHC President testifying on Affordable HousingLegislation aimed at increasing the nation’s supply of affordable housing was introduced by Senate and House tax writers this week while the National Multifamily Housing Council (NMHC) and National Apartment Association (NAA) offered joint testimony before a March 7 Senate Finance Committee hearing on “Tax Policy’s Role in Increasing Affordable Housing Supply for Working Families.” (NMHC President Sharon Wilson Géno, above and MarketWatch, March 9)

Solutions to Meet the Need 

  • A new report from real estate brokerage Redfin shows that the number of affordable home listings fell 53% from last year—the largest annual drop in Redfin’s records, which date back to 2013. (The Hill and Redfin news release, March 3)
  • The National Low Income Housing Coalition estimates there is a shortage of 7 million affordable and available rental homes in the United States, while a Rosen Consulting Group study reports the underbuilding gap is 5.5 million units.
  • This week’s Senate hearing displayed bipartisan policymaker consensus on the need to increase the supply of affordable housing by expanding the Low-Income Housing Tax Credit (LIHTC) and other tax incentives. (TaxNotes, March 8 and Congressional Research Service, “An Introduction to the Low-Income Housing Tax Credit”)
  • During the hearing, NMHC President Sharon Wilson Géno offered joint testimony that included recommendations to address the affordable housing crisis, including tax policy, regulatory reform, rental assistance, and development incentives. (NHMC News | Video of Géno’s remarks and Written testimony, March 7) 

Senate Bills Senate Finance Committee Chairman Ron Wyden (D-OR)

  • Senate Finance Committee Chairman Ron Wyden (D-OR), above, noted his support for the Affordable Housing Credit Improvement Act (AHCI), the Neighborhood Homes Investment Act, and the reintroduction of the Decent, Affordable, Safe Housing for All (DASH) Act in his opening comments. 
  • Wyden’s DASH Act would strengthen the LIHTC and offer a new Middle-Income Housing Tax Credit (MIHTC) that would provide a tax credit to developers who house tenants between 60 and 100% of the area’s median income. (DASH Act Text | Bill Summary | Section-by-section)
  • The AHCI would expand the pool of tax credits allocated to states for new affordable housing, make it easier to combine LIHTC with other sources of capital like private activity bonds, and facilitate LIHTC rehab projects.
  • Wyden added in his opening comments, “Members of Congress also need to keep pushing state and local authorities to cut back on the thicket of zoning rules that get in the way of building the housing Americans need.”
  • The Roundtable has supported these Senate bills since they were introduced last year. Real Estate Roundtable President and CEO Jeffrey DeBoer previously stated, “Overly restrictive land-use and zoning policies, construction cost increases, and labor shortages are deepening our housing challenges, which now extend across the entire country. Government at all levels needs to be part of the solution, not part of the problem.” (Roundtable Weekly, July 22, 2022) 

House Action Capitol bright sky

  • Reintroduction of similar LIHTC legislation in the House is expected by Reps. Suzan DelBene (D-WA) and Brian Higgins (D-NY). (BGov, March 2)
  • Additionally, House Ways and Means Tax Subcommittee Chair Mike Kelly (R-PA) and committee member Jimmy Panetta (D-CA) on March 1 reintroduced the More Homes on the Market Act, which would double the capital gains exclusion for home sellers to $500,000 for single individuals and $1 million for married couples. (TaxNotes, March 8) 

Despite widespread congressional support for certain affordable housing legislation, prospects for the bills are uncertain until the national debt ceiling issue is addressed—and a tax legislative package is identified that could include such measures. 

#  #  # 

President Biden’s FY2024 Budget Aims to Raise Taxes on Real Estate, Capital Formation, and Investment

Posted on by Trey Jackson

FY2023 Budget Cover

The Biden administration yesterday proposed a $6.9 trillion FY2024 budget that includes $3 trillion in deficit reduction and $2.2 trillion in tax increases over the next decade on corporations, high-earning households, and certain business activities, including real estate investment. (White House budget materials and Treasury Department news release)

Blueprint for Negotiations

  • Real Estate Roundtable President and CEO Jeffrey DeBoer said, “Congress has rejected several of these same tax proposals in the past. In particular, Congress has said no to proposals to double the capital gains rate, tax gains reinvested in property of a like-kind, or taxing unrealized gains. We will strongly urge that these counter-productive proposals again be rejected. They have weak policy support, are poorly timed and quite risky given the current uncertain economy.”
  •  Of note for real estate:
    • Capital Gains Rate
      The top, combined tax rate on long-term capital gains would nearly double from 23.8% (20% + 3.8% net investment income tax) to 44.6%. This results from increasing the maximum capital gains rate from 20% to 39.6% and a new proposal to increase the net investment income tax from 3.8% to 5%.
    • Mark-to-Market Tax on Unrealized Capital Gains
      The FY 2024 budget carries over President Biden’s proposal from last year, imposing a retroactive, annual minimum tax of 25% on the income and unrealized gains of taxpayers with wealth (assets minus liabilities) exceeding $100M.
    • Real Estate Professionals
      The budget also carries over a proposal to extend the 3.8% net investment income tax to real estate professionals and other pass-through business owners who are currently exempt from the tax because they are active in their business.

Tax ProposalsChicago cityscape sky view

  • Other real estate-related tax proposals include:
    • Taxing carried interest as ordinary income
    • Limiting the deferral of gain from like-kind exchanges
    • Increasing the top tax rate on ordinary income to $39.6%
    • Ending step-up in basis and taxing unrealized capital gains at death
    • Expanding the limitation on excess business losses for non-corporate taxpayers by converting the limitation from a 1-year deferral to a permanent compartmentalization of active pass-through losses
    • Modifying tax rules for grantor retained annuity trusts (GRATs) and grantor trusts
    • Recapturing and taxing real estate depreciation deductions at ordinary income tax rates
  • The budget also devotes $59 billion to provisions aimed at increasing the supply and availability of affordable housing, as well as $10 billion “to incentivize State, local, and regional jurisdictions to make progress in removing barriers to affordable housing developments, such as restrictive zoning.” Tax incentives in the budget include an expansion of the low-income housing tax credit (LIHTC) and a new tax credit for the development of affordable, owner-occupied housing.

These tax issues and other policies affecting CRE will be discussed during The Roundtable’s Spring Meeting on April 24-25 in Washington.

#  #  # 

Roundtable, Trade Organizations Urge Treasury to Withdraw FIRPTA Regulatory Proposal

Posted on by Trey Jackson

The Real Estate Roundtable and 16 other trade organizations weighed in this week against a proposed IRS rule that would expand the reach of the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980.

Retroactive Rewrite

  • On December 29, Treasury and the IRS released proposed regulations that would redefine what constitutes a domestically controlled REIT and impose capital gains taxes, through FIRPTA, on investment structures that taxpayers have used for decades when planning real estate and infrastructure investments in the United States.
  • For purposes of FIRPTA and the exemption for domestically controlled REITs, the proposed look-through rule would no longer treat a taxpaying U.S. C corporation (that is a shareholder of a REIT) as a U.S. person if more than 25% of the owners of the C corporation are foreign. The result would be that many REITs previously exempt from FIRPTA would be thrust, retroactively, into the discriminatory tax regime.

Industry Response

  • On Monday, The Roundtable, Nareit, American Investment Council, Managed Funds Association, and ICSC submitted detailed comments to Treasury urging withdraw of the proposed look-through rule. The organizations wrote that the rule would “reverse decades of well-settled tax law, severely misconstrue the statute, and contradict Congressional intent,” as well as potentially “impair real estate’s access to foreign capital at a critical economic juncture and undermine foreign investors’ confidence in the stability and predictability of U.S. tax rules.” (Letter to Treasury, Feb. 27)
  • On Wednesday, The Roundtable and 14 other real estate trade organizations wrote to the congressional tax-writing committees asking Members of Congress to encourage the Treasury Department and IRS to withdraw the rule, which could put property value, jobs, and communities at risk unnecessarily. (Letter to congressional tax committees, March 1)
  • Treasury’s regulatory package also included favorable final rules regarding the FIRPTA foreign pension fund exemption and a helpful proposal related to real estate investments and the tax exemption for foreign governments.

The principal drafters of the Treasury comment letter were Roundtable Tax Policy Advisory Committee (TPAC) members David Levy (Weil Gotshal) and David Polster (Skadden), as well as Nickolas Gianou (Skadden). TPAC members also met virtually with Treasury officials on February 15 to discuss the proposed regulation. TPAC will remain active and engaged with the administration on this issue as the process unfolds.

#  #  #

Treasury Dept. Issues New Rules on Taxation of Foreign Investment in U.S. Real Estate

Posted on by Trey Jackson

Foreign Investment in Real Property Act - book

On December 28, Treasury and the IRS released new tax regulations affecting foreign investment in U.S. real estate. 

FIRPTA

  • Among the changes, a proposed rule would repeal a long-standing private letter ruling that foreign investors have relied on when structuring inbound investments. 
  • Under current law, shareholders of domestically controlled REITs are not subject to the Foreign Investment in Real Property Tax Act (FIRPTA)—a statutory regime that subjects foreign investors to capital gains tax on their U.S. property investments. 
  • The proposal, if finalized, would expand the reach of FIRPTA by denying a REIT’s status as domestically controlled if a U.S. corporate shareholder of the REIT is foreign-owned. In other words, the rule would look through a domestic C corporation that owns the REIT, even if the C corporation is a U.S. taxpayer that pays U.S. income tax. 
  • The proposed regulation surprised foreign investors and real estate fund managers who have relied on a 2009 IRS private lettering rule, which held that a domestic C corporation that owns shares in a REIT is a U.S. owner for purposes of determining whether the REIT is domestically controlled. 
  • The proposed rule appears to conflict with policies underlying FIRPTA-related ownership attribution changes enacted in the 2015 PATH Act.  As a practical matter, the tax consequences of the proposal are retroactive because they would apply to existing investments made years ago. (Weil Tax Alert and Skadden Insights)

Additional Provisions & Regulations

Treasury Department

  • Other provisions in the proposed regulations are more favorable. For example, they include rules that allow a sovereign wealth fund to preserve the tax exemption applicable to foreign governments if the fund has only a minority, non-controlling interest in a U.S. real estate business. 
  • Simultaneously, Treasury also released final regulations last month related to the FIRPTA exemption for foreign pension funds, which the Roundtable worked to enact in 2015. The final regulations are largely positive and should facilitate even greater investment in U.S. real estate by qualified foreign pension funds. 

The Real Estate Roundtable’s Tax Policy Advisory Committee (TPAC) has created a working group to develop formal comments and respond to the recent Treasury releases.

#  #  #