Real Estate Regulation To Watch For In 2016

January 27th, 2016 by JBWK

Changes to the EB-5 visa program — which recently received an extension until September 2016 — and to rules for real estate investment trust spinoffs are among the areas of law that real estate lawyers will have their eyes on in 2016. Add to that modifications of the Foreign Investment in Real Property Tax Act and a new law that could impose income tax liability on limited liability company members at the partnership level, and you have the potential for significant impacts on U.S. commercial real estate.

Here are the areas of real estate legislation everyone should watch in 2016.

REIT Spinoffs

Companies over the past year and a half have been particularly active in spinning off certain portions of their business as REITs after the IRS broadened the definition of real property, but such spinoffs will likely be curbed in 2016 thanks to a new law as part of the December budget bill.

Companies like Sears Holdings Corp. and Darden Restaurants Inc. have recently completed REIT spinoffs. And while the IRS has made it possible for more companies to do such deals by broadening its definition of real property, the latest tax changes will such deals less attractive, many say.

Partnership Tax Law

A portion of a partnership tax law recently signed into law by President Obama could have marked implications for how tax audits of LLCs — as well as other partnerships that commonly own real estate — are treated, by imposing tax liability at the partnership level.

Partnerships currently get flow-through treatment, meaning tax liability at the partnership level is passed down to the partners, which often results in a lower tax rate than the rate that would be assessed to the entity as a whole.

The change appears at the end of the Bipartisan Budget Act of 2015.

When the change takes effect, taxes applied at the partnership level would be assessed as the highest rate for that year for corporations or individuals.

FIRPTA

The Foreign Investment in Real Property Tax Act imposes tax on foreign owners of real estate upon disposition, and lawmakers in Washington have for years been calling to reform the act to encourage additional foreign investment in U.S. real estate.

One of the latest changes,  part of the spending and tax bill signed by Obama, allows foreigners to hold as much as 10 percent, up from the current threshold of 5 percent, of a public REIT without being subject to FIRPTA.

The new spending bill also makes foreign retirement and pension funds exempt from FIRPTA.

EB-5

EB-5 allows foreigners to commit a minimum of $500,000 in a job-creating U.S. project and come out of the deal with the principal back and a green card. The program went for a roller-coaster ride in September, when Congress for the first time in the 25 years of EB-5 failed to renew it. Lawmakers came close to making significant changes and then in December extended it as-is until September 2016.

That decision sets up another round of talks in a year’s time over whether to extend the program again and what changes should be made.

Another question is how the U.S. government will address growing concerns of fraud at EB-5 Regional Centers, entities set up by the government to facilitate EB-5 investment. And then there’s the question of whether the $500,000 minimum investment should be raised.

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