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Congress relaxes tax law on foreign real estate investors

Demand for commercial real estate in California is arguably more active now than at anytime since the economic downturn. Prices for commercial properties have been robust as the economy has steadily improved. And with a recent move by Congress, the coming New Year is poised to be a banner year for investors and developers alike.

According to a recent Wall Street Journal article, Congress recently relaxed the Foreign Investment in Real Property Tax Act; a law that requires foreign investors to pay income taxes when they sell a property in the United States. The law was initially passed 35 years ago, when there were growing fears that foreign investors would buy up large swaths of commercial real estate, including office buildings and farmland. 

The move was viewed by many as a protectionist measure. But as more foreign public pension funds began buying these properties over the next two decades, the measure was accepted as a vestige of the past the could prevent future development. The Wall Street Journal reports that foreign pension funds are the largest sources of foreign money that are used in commercial real estate projects.

These investments are arguably responsible for the records set for commercial properties in a number of cities, despite the tax applicable to foreign investments. Foreign pensions have simply purchased shares of up to 49 percent to avoid the tax, but they must share ownership (and control) of such a property with other investors.

With the relaxation on taxes, foreign investment in commercial projects is expected to increase by $20-$30 billion per year, while the legislation is estimated to cost $4.25 billion over ten years. 

If you have questions about how this change may affect your next commercial real estate transaction, The Loftin Firm can advise you. 

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