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Do Taxes Matter to Foreign Real Estate Investors? Evidence from FIRPTA Reform

Margot Howard and Katherine A. Pancak
The Journal of Portfolio Management Real Estate Special Issue 2019, jpm.2019.1.100; DOI: https://doi.org/10.3905/jpm.2019.1.100
Margot Howard
is an assistant professor in the Mason School of Business at the College of William & Mary in Williamsburg, VA
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Katherine A. Pancak
is a professor at the University of Connecticut in Stamford, CT
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Abstract

There is little research on whether foreign real estate investors respond to domestic taxes, which is somewhat ironic given that real estate is such a tax-driven industry. This article investigates the impact of taxes on foreign investment in real estate by exploring the response to 2015 reforms to the Foreign Investment in Real Property Tax Act of 1980, a unique section of the US Internal Revenue Code that imposes real estate income and capital gains withholding taxes on foreign investors. The new law exempts qualified foreign pension funds, with the effect of reducing capital gains withholding taxes by up to 35% depending on investor position and home country tax treaties. The authors find that this reform led to a five to seven percentage point increase in annual investment growth from pension funds in countries that experienced a tax rate decrease, relative to general trends in foreign pension fund investment in US real estate investment trusts. In addition, the results suggest that pension funds in those countries responded almost immediately.

TOPICS: Real estate, legal/regulatory/public policy

Key Findings

  • • The results in this paper suggest that domestic income taxes can be an important determinant of foreign investment in domestic real estate.

  • • Recent changes to the U.S. taxation of foreign investment in U.S. real estate were associated with increased annual growth in investment in U.S. REITs from foreign pension funds in countries that received a tax rate decrease (relative to general foreign pension fund investment trends).

  • • Additionally, affected foreign pension funds appear to have adjusted their investment immediately after the tax reform went into effect.

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The Journal of Portfolio Management: 47 (5)
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Do Taxes Matter to Foreign Real Estate Investors? Evidence from FIRPTA Reform
Margot Howard, Katherine A. Pancak
The Journal of Portfolio Management Aug 2019, jpm.2019.1.100; DOI: 10.3905/jpm.2019.1.100

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Do Taxes Matter to Foreign Real Estate Investors? Evidence from FIRPTA Reform
Margot Howard, Katherine A. Pancak
The Journal of Portfolio Management Aug 2019, jpm.2019.1.100; DOI: 10.3905/jpm.2019.1.100
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  • Article
    • Abstract
    • FIRPTA BACKGROUND
    • PATH ACT AND QUALIFIED FOREIGN PENSION FUND INVESTMENT
    • DATA
    • RESULTS
    • CONCLUSION
    • ADDITIONAL READING
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