18
Nov 2022
Changing FIRPTA: The Concerns and Benefits It Has on the Real Estate Industry

Changing FIRPTA: The Concerns and Benefits It Has on the Real Estate Industry

By Marc Shaw

Congress passed the Foreign Investment in Real Property Tax Act (FIRPTA) in 1980 in response to concerns about real estate purchases in the U.S. by foreign buyers. The goal of this act was to impose a tax and regulatory requirement on foreign real estate investors. Although concerns about foreign real estate buyers and the illegalities that at times came of them abated as we moved into the 21st century, FIRPTA has remained in place. Some critics even believe it is time to update FIRPTA to reflect the current conditions of the real estate market and address some of the difficulties it has created. 

At World Wide Land Transfer, we understand that FIRPTA has had a significant impact on the U.S. real estate market over the past 4 decades and that making changes to it could have far-reaching consequences. Here is our interpretation of FIRPTA and what the positive and negative effects of changing it could be:

Potential Benefits of Changing FIRPTA

FIRPTA critics argue that the act is no longer necessary in the current real estate market and that it has prevented investment in affordable housing and has hampered economic growth in the post-pandemic environment. 

In response to these concerns, Congress made some updates to FIRPTA in 2015 in the Protecting Americans from Tax Hikes (PATH) Act, which created exceptions for publicly-traded real estate trusts regardless of the residency status of their owners. In April 2021, former New York Representative Tom Suozzi introduced a bill (H.R. 3123), which would have expanded on FIRPTA exceptions for foreign real estate investors. Although this bill was introduced in the House of Representatives and referred to the House Committee on Ways and Means, no vote was ever taken on it.

At the time of the bill’s introduction, Representative Suozzi wrote that it would, “encourage substantial investment into the U.S., bringing critical economic opportunity, job growth, and support for affordable housing to our communities.” He believed that not only would it bring economic opportunity to his home state of New York, but to other states as well.

As far as the real estate industry is concerned, the former New York Representative was correct. Weakening FIRPTA would certainly make it easier for foreign investors to purchase real estate in the U.S., and it would also remove the requirement for buyers to withhold 15% of the property’s sale price in escrow until the IRS was satisfied that the sellers had fulfilled all their tax obligations. Increased activity in this sector would almost certainly create more jobs for real estate professionals and others who provide services for them.

Potential Negative Consequences of Changing FIRPTA

While real estate investment by non-U.S. citizens can bring a much-needed influx of capital in situations where domestic investors are unwilling or unable to invest, some critics believe there are negative consequences that come along with it. In an article submitted to the U.S. Department of Agriculture in 1976, shortly before FIRPTA was passed, property rights advocate Gene Wunderlich warned that while there may be short-term benefits to foreign real estate investment, it can also cause issues in the long term.

“The initial impact that foreign investment in real estate has on employment, income, and growth appears positive on the net but is subject to some negative effects such as increased land prices. In the long run, real estate investment yields interest or rent with a reverse effect on the balance of payments. Both the initial and long-run impacts of real estate investments are affected by general economic conditions.”

Wunderlich posited that while certain economic conditions may necessitate foreign investment when those conditions change, it could put domestic investors, renters, and real estate buyers at a disadvantage. He proposed that, while more data was needed on this topic, limited federal restrictions on land ownership by foreign individuals would be prudent, and that encouraging state and federal governments to identify foreign real estate interests and systematically record them could provide a clearer picture of how foreign investment impacts domestic interests.

Conclusions

As a longtime title insurance and escrow service provider to lenders, homebuyers, and real estate professionals, the team at World Wide Land Transfer is happy to serve any client, regardless of their country of origin. No matter what the current laws in this area may be, we will always strive to comply with federal and state regulations and reporting requirements in every transaction in which we participate. 

It is also important to note that FIRPTA has several exceptions, meaning it will not apply to most residential real estate transactions. For example, the withholding requirement does not apply to real estate transactions under $300,000. If you are a foreign or domestic person conducting a real estate transaction, we encourage you to get in touch with us regarding title insurance and escrow services that can help your transaction go more smoothly. We serve clients all over the country, so call us about PA and NJ title insurance or title and escrow services in any other area.

World Wide Land Transfer is a service-oriented title company with offices in Philadelphia, New York, and Washington, D.C. With a record of going above and beyond, we are trusted to close everything from complex commercial transactions to residential refinance and purchase transactions.

 

Past Postings on FIRPTA:

Understanding the Effects of FIRPTA Exemptions

Foreign Investment in Real Property Tax Act Amended

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