Introduction to the Taxation of Foreign Investment in U.S. Real Estate
The impact of taxes on real estate
Real estate is very much a tax-driven industry. As a result, changes in U.S. tax policy have an impact on the relative attractiveness of real estate as an investment class for non-U.S. investors. Increases to the U.S. tax rates on capital gains, the taxation of the disposition of real estate, and US tax reporting requirements are often cited as examples of such policies that create obstacles to investment. Over the years, real estate organizations in the U.S. have offered proposals which would provide some relief and have sought clarification of existing rules. These efforts have met with various degrees of success. For example, in recent years there have been numerous improvements and clarifications to tax rules governing the operations of Real Estate Investment Trusts (“REIT”). Additionally, the taxation of certain transactions involving the origination and modification of indebtedness has been somewhat relaxed to respond to the concerns of the impact of taxes on an already distressed economy.
On the other hand, recent proposals to reduce or repeal the taxation of the disposition of real estate by non-U.S. investors have not resulted in any substantive changes as of the printing of this Guide. Finally, recent proposals by the current Obama administration seek to further tighten the U.S. tax reporting requirements associated with cross border payments and transfers. While the ultimate impact of such proposals is unclear, it is important that investors have an understanding of the tax rules currently in place in order to effectively develop a U.S. real estate strategy.
The following is an introduction to some of the more significant tax issues that should be considered by non-U.S. investors in this regard.