Foreign investment in U.S. real property has declined from more than $25 billion to $7 billion annually, the National Association of Realtors reports
. The reduction in inbound foreign investments has spurred discussion about the impact of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) on investment.
FIRPTA requires that 10 percent of a real property transaction involving a non-U.S. citizen be withheld to cover potential tax liability. The dollar amount is typically based on the selling price. The act came into being when foreign investors were beginning to significantly increase their real estate holdings in the United States. It assures that foreign interests pay capital gains taxes on income earned on the sale of their U.S. real estate investments.
Defenders of FIRPTA say that if offshore investors can enjoy the ability to purchase, hold and realize the increase in value when they sell their U.S. property, they should be required to pay the same taxes that U.S. citizens must pay.
In contrast, detractors point at the FIRPTA as a reason for the significant drop in foreign investment in U.S. real estate. They find it unfair to single out foreign investors with the 10 percent withholding of the sales price. The act requires that 10 percent be withheld without regard to whether an investor is making money on the investment. Furthermore, they pose that infusion of foreign capital into the U.S. real estate market would help the economy, especially at a time when capital markets are frozen.
