How This Obama Move Impacts Foreign Investors

The new Foreign Investment in Real Property Tax Act (FIRPTA) intends to promote increased cross-border investment in US real estate—something that has been a big impediment for foreign investment for a long time. Under the changes, non-US investors can now hold up to 10% of a publicly traded US REIT’s stock without triggering FIRPTA upon sale of the stock or upon receiving proceeds from a REIT’s sale of assets.

So, how does Obama’s easing of this 35 year-old tax impact foreign investment in South Florida real estate? We caught up with Carlos Somoza, an international tax principal at Miami’s Kaufman Rossin, to get some answers.

GlobeSt.com: How will changes to FIRPTA impact foreign investment in the U.S., specifically in South Florida? 

Somoza: One of the purposes of the Protecting Americans from Tax Hikes Act of 2015—the “PATH Act”—is to make it more attractive for foreign investors to invest in US real estate. This is being effectuated by allowing qualified foreign pension funds to be exempt from the existing FIRPTA withholding rates, which were 10%, but will be increased to 15% under PATH.

A second incentive increases the maximum stock ownership a foreigner may have in certain Real Estate Investment Trusts (REITs) and be able to avoid FIRPTA withholding. The withholding will now be eased for foreigners who own up to 10% of certain REITs, an increase from 5%.

However, these more lenient provisions are offset by an increase in the amount of FIRPTA withholding that applies when a foreigner sells US real estate. South Florida’s real estate market has seen high rates of foreign investment in recent years, and that will likely continue and possibly even increase now that these FIRPTA requirements have been eased.

GlobeSt.com: What bigger trends are happening in investment as a result of the easing of FIRPTA? 

Somoza: Although the United States has always been open to foreigners investing here, there is also a movement for more transparency. For example, the Financial Crimes Enforcement Network (FinCEN) recently announced a Geographic Targeting Order that will require certain US title insurance companies to identify the individuals utilizing companies to purchase high-end U.S. real estate in all-cash deals in Manhattan and Miami-Dade County.

GlobeSt.com: What are the tax implications now under the new tax change?

Somoza: The more lenient tax provisions mentioned above are offset by increasing the amount of FIRPTA withholding that applies when a foreigner sells US real estate. Such rate will increase from 10% to 15% for transactions transferred on or after February 17, 2016. Overall, the FIRPTA changes will reduce the U.S. income tax burden on foreigners investing in US real estate through certain foreign pensions and REITs.