Introduction to the Taxation of Foreign Investment in U.S. 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 U.S. tax reporting requirements are often cited as examples of policies that create obstacles to investment. Over the years, real estate organizations in the United States have offered proposals that 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 (REITs). Additionally, the taxation of certain transactions involving the origination and modification of indebtedness has been somewhat relaxed as a response to the concerns of the impact of taxes on an already distressed economy.
Although there was not much legislative activity in 2013, examples of regulatory activity and tax policy proposals are impacting inbound investment. 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.
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