Does the U.S. tax foreign real-estate investors too much?

McClatchy Washington BureauDecember 11, 2013 


London, England, is known for its historic bridges over the River Thames.


— Republican Rep. Kevin Brady says he has a surefire plan to create thousands of jobs in his home state of Texas and across the country: Scrap the tax on foreigners who buy U.S. real estate.

“My personal goal is to repeal it entirely. . . . This is all about American jobs,” Brady, a veteran member of the House Ways and Means Committee, said in an interview.

The tax is part of a growing debate over whether the United States is doing enough to welcome foreigners and their money. While the tax, created 33 years ago, has added billions to the federal treasury, critics say it’s a relic, hurting the country in the chase for more global trade.

The late Republican Sens. Malcolm Wallop of Wyoming and John Heinz of Pennsylvania convinced Congress to create the special capital-gains tax in 1980, arguing that Americans had suffered from escalating land prices and higher food costs after German investors gobbled up U.S. farmland.

Those who’d repeal the tax say the economy has evolved. For Kevin Crummy, an international real estate expert from Los Angeles, one comparison is telling: Asians invested nearly $10 billion in commercial properties in London during the first 11 months of this year, more than they spent in the entire United States. Crummy’s analysis used data from Real Capital Analytics, which follows trends in commercial real estate.

“The city of London should not be kicking our butt, but it is, because we’ve put up this barrier that’s preventing people from making investments,” said Crummy, the managing director of Eastdil Secured.

Supporters of a repeal face one big hurdle: With the federal government $17 trillion in debt, congressional Democrats have shown little appetite for losing any more tax revenue.

Asked whether he favored getting rid of the tax, Democratic Rep. Jim McDermott of Washington state, another member of the Ways and Means Committee, replied: “You’re barking up a tree that doesn’t have a bear. I’m hunting for real problems.”

With a full repeal unlikely anytime soon, Brady wants to reduce the tax hit from the 1980 law, the Foreign Investment in Real Property Tax Act. It now requires the foreign buyer of a property to pay 10 percent of the sales price to the Internal Revenue Service, or up to 35 percent if the buyer is a corporation or partnership. Brady’s backers say reducing the tax should be an easy sell.“What I would say to Congress is, ‘Look, you’ve got a 35 percent tax, and 35 percent times zero is zero. If we lose the investment to London, you get zero,’ ” Crummy said.

Brady has opted for a go-slow approach, lining up bipartisan backing for legislation that would cut the tax bills of some foreign investors as a starting step. His Real Estate Investment and Jobs Act of 2013 would double the amount a foreigner could invest in a U.S. real estate investment trust without paying the tax from 5 to 10 percent.

But no one’s expecting a vote soon; the bill, which has 23 co-sponsors, has yet to even receive a hearing.

“Once you have an esoteric tax on the books that nobody really understands in the first place, it’s almost impossible to get rid of it,” said Ronald Dickerman, the president of Madison International Realty in New York.

Dickerman said the law’s complexity was obvious when he went to Capitol Hill last month: “In the meetings we had with some pretty sophisticated folks from Congress, very few even understood what this was all about.”

In the Senate, New Jersey Democrat Robert Menendez has lined up 32 co-sponsors for a similar bill. In 2010, the idea proved popular, passing the House of Representatives by 402-11, but the Senate failed to take up the legislation.

The broader issue of foreign investment has gained a higher profile lately, thanks to an aggressive boost from the White House.

When the White House invited more than 630 executives from 58 countries to Washington on Oct. 31 for a two-day investment meeting, Gene Sperling, President Barack Obama’s chief economic adviser, told them the administration had organized the unprecedented gathering to deliver a message “in a very bold way.”

“We want to make this clear: This is not a xenophobic nation,” Sperling said. “If you want to come here and make your fortune – playing by the rules, investing in the United States, creating jobs – we don’t just tolerate it, we welcome you with open arms.”

Obama paid his own visit, telling the executives he wanted to make it easier for them by putting 32 U.S. ambassadors in charge of special investment teams across the globe.

While the Obama administration doesn’t want to eliminate the foreign investment tax, the president’s 2014 budget proposal called for tweaking it to exempt foreign pension funds used to buy U.S. real estate.

The administration’s wooing has impressed many foreign executives, including Kapil Sharma, the senior North America general manager for the Indian company Tata Sons Ltd. But he said the president would have to continue the courtship.

“He just can’t put his arm around us and then walk away,” Sharma said. “He’s got to hold our hand and we’ve got to take a walk down the street and let all our friends see us.”

Sharma said he hoped that Congress treated all investors equally and Americans stopped distinguishing between foreign and U.S. companies.

“We’re here for the long haul,” he said. “This is a phenomenon that’s happening all over the world. . . . Over time, people will understand and appreciate that a foreign-based investor is no different than an American-based investor.”

He said many didn’t know the difference now: “People think Michelin is a U.S.-based company. . . . The Michelin Man is French.”

Historically, the U.S. has been the world’s largest foreign investor and the biggest recipient of foreign investment. By the end of 2011, foreigners had accumulated $2.6 trillion worth of investment in the United States, while American firms had accumulated $4.1 trillion worth of investment abroad, according to Department of Commerce estimates.

But industry experts say the competition has intensified.

Crummy said London offered a perfect example of why “something is seriously wrong.”

While Asian investment in commercial properties in the United States this year stood at $8.6 billion through November, Asian investment in the city of London alone was 14 percent higher, at $9.8 billion, he said.

“We should be like six times London, or eight times London,” Crummy said.

No one’s certain how much foreign investment the United States would gain if Congress junked the tax, but there’s plenty of speculation.

Analysts say ending the tax would cost less than $1 billion per year, and Dickerman predicted that the revenue loss would easily be offset by the amount of foreign investment in the United States more than doubling, to $40 billion or $50 billion per year.

“There’s never been a moment where the U.S. economy is so sluggish and looking for a shot in the arm,” Dickerman said.

The gridlocked Congress is moving slowly. In September, the House voted to ask the Commerce Department to study the barriers to foreign investment and suggest ways to get rid of them.

While Brady said it would be ideal for the House to pass his bill by year’s end, he said it more likely would become part of a larger package of tax measures.

He objected to his bill being characterized as a tax break for foreigners, saying its sole aim is to rev up the U.S. economy.

“This doesn’t help foreigners; they have lots of places to invest,” he said. “We ought to be encouraging investment from around the world in commercial real estate. We’re a great country to invest in.”

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