The Trump Administration on Monday released a $4.8 trillion budget for FY 2021 signaling policy priorities for a potential second term, followed by Senate and House committee hearings this week that focused on the proposal and tax-related issues – including FIRPTA repeal; correcting a drafting error affecting qualified improvement property (QIP); and expansion of the low-income housing tax credit. (Administration’s 2021 budget proposal and supporting budget materials)
- Initial budget proposals from the White House are useful only as a starting point for funding negotiations with Congress, which can produce a significantly different budget reflecting vastly different policy positions.
- The Administration’s FY 2021 budget proposal would also reverse a two-year deal negotiated with Congress last summer. While the August deal raised spending limits for both defense and domestic programs, this week’s proposed budget would cut domestic spending by six percent. (The Hill, Feb. 9)
- The proposed budget also includes the elimination of several energy tax incentives of importance to real estate, including:
* Repeal credit for residential energy efficient property placed in service after December 31, 2020.
* Repeal accelerated depreciation for renewable energy property —including solar energy, wind energy, biomass, geothermal, combined heat and power, and geothermal heat pump property; fuel cells; and micro-turbines—would range from five to 20 years. Qualifying properties would still be eligible for the bonus depreciation allowance included in the 2017 tax overhaul.
* Repeal energy investment credit for property where construction begins after December 31, 2020.
The White House budget, which would also devote billions to construct a border wall with Mexico and lead to a $966 billion deficit, was immediately rejected by House Speaker Nancy Pelosi (D-CA) and criticized by House Budget Committee Chairman John Yarmuth (D-KY). (Associated Press, Feb. 9)
- Republican Senate Budget Chairman Mike Enzi (WY) also weighed in with a Feb. 10 statement. “Presidents’ budgets are a reflection of Administration priorities, but in the end, they are just a list of suggestions, as the power of the purse rests with Congress. Bipartisan consensus will be necessary to bring our debt and deficits under control. I hope to work with my colleagues on both sides of the aisle to put our country on a more sustainable fiscal course.”
Administration officials appeared before congressional committees this week to testify about the budget proposal and face Q&A on other policy issues.
More congressional hearings on the budget and appropriations are scheduled after lawmakers return from next week’s congressional recess.
# # #
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.
# # #
Leading industry experts convened on Oct. 30 at the National Press Club in Washington for an in-depth discussion on IRS Notice 2007-55, which levies discriminatory tax penalties on foreign investment in U.S. real estate and infrastructure. The panel detailed how the Notice subjects foreign owners of domestically controlled real estate investment trusts (REITs) to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) when the REIT liquidates, thereby suppressing capital investment and job creation in the real estate industry.
- The 2007 tax guidance from the IRS overturned long-standing practice that treated liquidating distributions and redemptions of REITs as sales of stock. Under Notice 2007-55, these transactions are now treated as taxable distributions and subject to a burdensome capital gains tax – affecting only foreign shareholders. In the 12 years since Treasury issued the Notice, there have been no clarifying regulations, which has created uncertainty among potential investors and deterred foreign investment in U.S.-based real estate and infrastructure.
- Panelists at the event, sponsored by Unibail-Rodamco-Westfield, included Ryan McCormick, Senior Vice President and Counsel for The Real Estate Roundtable (far right in photo above); John Jones, Vice President of Government Relations for Nareit; Kevin Klein, Director of Tax Policy for the Organization of International Investment (OFII); Darin Mellott, Director of Research, Americas at CBRE; and David Polster, Tax Partner at Skadden Arps.
- McCormick emphasized that FIRPTA is a tax burden that does not apply to any other asset class and noted that FIRPTA hurts the ability of the United States to attract outside capital for infrastructure improvements. Treasury could act on its own to remove much of the FIRPTA burden simply by withdrawing the IRS guidance. “Anything the Administration can be doing now to drive our economy forward and create jobs, they should,” said McCormick.
- Outright repeal of the outdated FIRPTA law is The Roundtable’s ultimate policy goal. 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)
- Both Republican and Democratic lawmakers agree on the negative impact that the Notice continues to exert on infrastructure investments. In 2017, 32 bipartisan members of the House Ways and Means Committee wrote to Treasury Secretary Steven Mnuchin urging him to repeal the Notice. The lawmakers pointed to billions of dollars’ worth of investment that flowed to small and mid-sized communities when 2015 legislation eased some of the tax burden for foreign investors.
A report by the Rosen Consulting Group (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate. This new level of activity would lead to the creation of 147,000 to 284,000 jobs throughout the economy and increase taxpayers’ income by $8 billion to $16 billion. (Unlocking Foreign Investment in U.S. Commercial Real Estate, July 2017)
# # #