This week, 11 Senators sent a bipartisan letter urging Treasury Secretary Steven Mnuchin to withdrawal section 2 of IRS Notice 2007-55, which applies U.S. capital gains tax to certain types of inbound real estate investment transactions that were previously treated as nontaxable under the Foreign Investment in Real Property Tax Act (FIRPTA). (Roundtable background on FIRPTA)
- Specifically, prior to the Notice, a domestically controlled REIT could sell its assets and liquidate, and the liquidation would be treated as a sale of stock (and a foreign investor in the REIT would not owe U.S. capital gains tax). This “sale of stock” treatment is consistent with how corporate liquidations are regularly taxed. The IRS Notice reversed the longstanding tax treatment of these transactions and took the position that a liquidating distribution of a domestically controlled REIT is a taxable sale of the underlying real estate assets.
- The letter, led by Sens. Johnny Isakson (R-GA) and Robert Menendez (D-NJ), notes, “This unintended tax burden discourages foreign investors from putting capital to work to create jobs and improve our communities.”
- The group of Senators, which includes Senate Banking Committee Chairman Mike Crapo (R-ID) and the Democratic co-chair of the Senate Real Estate Caucus, Senator Ben Cardin (D-MD), requests that Treasury restore Congress’s intended treatment of liquidating REIT distributions, encourage increased foreign investment in U.S. real estate, and further spur job creation in the United States by reversing the IRS Notice. According to the Senators, “trillions of dollars in global capital are estimated to be available that could be invested in the U.S. real estate market. Our tax policies should welcome such investment, not discourage it.” (Senators’ letter, Dec. 18)
- In addition to Senators Isakson, Menendez, Crapo, and Cardin, the signatories included: Sen. Pat Roberts (R-KS), Sen. John Thune (R-SD), Sen. Debbie Stabenow (D-MI), Sen. Rob Portman (R-OH), Sen. Steve Daines (R-MT), Sen. Tom Carper (D-DE), and Sen. Tim Scott (R-SC). All eleven signatories are members of the Senate Finance Committee. A similar letter was sent in October 2017 by 32 Members of the House Ways and Means Committee.
- The Roundtable’s Tax Policy Advisory Committee (TPAC) Chairman Frank Creamer Jr. (FGC Advisors, L.L.C.), said, “The efforts of Senators Isakson, Menendez and the nine other signatories demonstrates the strong, bipartisan support for reducing the burden of FIRPTA on real estate jobs and investment.” Creamer added, “FIRPTA is an outdated law that imposes a discriminatory capital gains tax on foreign investors in U.S. real estate and infrastructure. It does not apply to any other asset class. Outside of complete FIRPTA repeal, Treasury could take a meaningful regulatory step and repeal IRS Notice 2007-55.”
- In April 2019, Representatives John Larson (D-CT) and Kenny Marchant (R-TX) introduced the Invest in America Act (H.R. 2210), a bill to repeal FIRPTA altogether. The Roundtable and 19 national trade organizations – representing every aspect of constructing, developing, financing, owning, and managing real estate and infrastructure in the United States – wrote to Ways and Means Committee Members and other key House lawmakers urging them to support the legislation. (Comment Letter, March 28).
President Trump in early 2017 directed the Treasury Department to review existing tax regulations to identify rules that are unnecessarily burdensome. Repeal of IRS Notice 2007-55 would represent another significant step toward reforming FIRPTA by reducing a tax regulatory burden.
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