President Obama recently released his 2014 budget proposal, and the budget proposes an exemption from U.S. taxation on gains realized by foreign pension plans on U.S. real estate investments. This proposal is projected to reduce tax revenue, and as a result, it will be challenging to enact at a time when there is considerable pressure to reduce budget deficits. However, if enacted, this proposal would make investing in U.S. real estate much more attractive for non-U.S. pension funds.
The United States generally requires foreign investors (under the Foreign Investment in Real Property Tax Act, or FIRPTA, regime) to pay taxes on, and file tax returns reporting, gains from the sale of U.S. real estate--in the case of a foreign corporation, the applicable effective federal tax rate on such gain may be as high as 54.5%. The President's budget proposes to exempt foreign pension plans from the FIRPTA regime, which it describes as an effort to establish tax parity between U.S. and foreign pension plans. In spite of this general description, however, the proposal seems to suggest an even more favorable tax treatment for foreign pension plans than the current law treatment of U.S. pension plans (e.g., it does not mention the tax currently imposed on U.S. pension funds for gains realized from debt-financed real estate). Moreover, although sovereign wealth funds benefit currently from another favorable exception under FIRPTA, the proposal as drafted does not contemplate extending the newly proposed exemption for sovereign wealth funds, except
possibly for foreign governmental pension plans. As a result of these issues (and the general nature of the budget description), it is very unclear whether or in what form any exemption from the FIRPTA regime will be enacted.
The proposed exemption would be effective for sales of U.S. real estate occurring after December 31, 2013. Any such exemption could of course significantly increase the potential after-tax returns for investments in U.S. real estate by certain foreign investors