June 20, 2013
Noting the trillions of dollars of loans tied to commercial real estate set to come due in the next few years, Senators Robert Menendez (D-NJ) and Mike Enzi (R-WY) proposed a bill to loosen the rules currently in place that serve to discourage foreign investment in U.S. commercial real estate property. The bill, if it passes, would help numerous commercial real estate property owners avoid foreclosure.
Before 1981, foreign persons and corporations generally paid no U.S. tax on sales of commercial real estate in this country. In 1980, Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA) to change that. Under the new law, all persons, foreign or domestic, had to pay U.S. income taxes on dispositions of real estate in the U.S. The statute exempted foreign investors owning less than 5 percent of the stock of a real estate investment trust (REIT.) The Real Estate Investment and Jobs Act, would increase the amount of REIT stock a foreign investor could own without triggering the tax, from 5 percent to 10 percent.
In a press release, Menendez stated that the proposed law would ease the current rules that “freeze out” foreign investors “by imposing an arbitrary withholding tax on the gains realized by overseas capital invested in domestic properties.” The Senator’s press release also pointed out that some $2 trillion in loans held by thrifts, banks and insurance companies, along with mortgage-backed securities, will mature in the next half-decade.
Menendez predicted potentially dire ramifications if Congress fails to reform FIRPTA’s rules. The Senator stated that if commercial real estate owners cannot find alternate sources of funding, including foreign investors, hundreds of billions of dollars of these debts could go into default, leading to a new wave of mass foreclosures, along with the collateral effects of significantly decreased property values and substantial constriction of capital available.
The law also reflects needed reform in the 21st Century global economy, according to the Senator. “[W]e are still living by rules which penalize overseas investors for investing in U.S. real estate at a time when their capital is sorely needed.” Additionally, the FIRPTA discourages foreign investors from entering the U.S. real estate in a way unlike the rules pertaining to all other classes of investments.
“[C]ommercial real estate properties throughout the nation are confronting an equity crisis that we must address. By increasing investment in commercial real estate, we can create American jobs and generate a need to build up surrounding infrastructure, including new sidewalks, roads and light rail projects. That’s the kind of positive chain reaction our economy needs,” Menendez stated.
As investors, both foreign and domestic, consider entering or expanding their presence in the commercial real estate market in New Jersey, they should take care to follow closely the tax rules pertaining to commercial property, in order to ensure compliance and maintain and up-to-date strategy. For the finest in advice, consult the New Jersey real estate attorneys at Samuel C. Berger, P.C. Our attorneys can help you address the changing rules and laws to ensure to maximize the benefit to you. Contact us online or call (201) 587-1500 or (212) 380-8117.
Blog Posts:
Requesting Expedited Processing of an EB-5 Immigrant Investor Visa Petition, New York & New Jersey Immigration Lawyer Blog, May 15, 2013
Proposed State and Federal Legislation Offers Tax Incentives for Technology Investment, Job Creation, and More, New York & New Jersey Business Lawyer Blog, April 25, 2013
Foreign Tax Credits Key to Bank of America’s Doubled Profits in 2012, New York & New Jersey CPA Tax Lawyer Blog, April 5, 2013