Strong US Dollar Holds Back Foreign Property Buyers

Congress expanded FIRPTA in a strong US dollar environment unfortunately.

WASHINGTON, DC—Well, the afterglow of Congress’ unexpected loosening of the Foreign Investment in Real Property Tax Act last December has suddenly dimmed. Briefly, Congress increased the stake a foreign shareholder may hold in a publicly traded stock to 10% without being subject to the FIRPTA tax. The measure also exempts foreign retirement and pension funds from FIRPTA. The industry had been calling for the expansion for years, citing the increased capital flows that would inevitably result. And indeed, those capital flows are likely increasing, or will, as the year continues. Unfortunately, Congress finally acted on to expand FIRPTA during a period when the US dollar has been very strong. The result? Less investment than might have been realized, at least in the short run. The National Association of Realtors suggested this might be the case in a blog post that looks at housing purchases by foreign buyers. The bottom line, the post said, is that home purchases by foreign buyers will not be as robust as the last time NAR measured this activity, which was the 12-month period between April 2014 and March 2015, when the dollar volume of home purchases of foreign buyers rose to $102 billion, led by purchases from Chinese buyers. “While NAR is yet to conduct its annual survey in April 2016, current economic indicators could prove challenging to foreign buyers and may indicate an easing of foreign demand,” it said. The reasons are twofold: rising home prices — the median price of an existing home is now $213,800, an 8% increase from last year — and the strong US dollar. NAR notes that the US dollar has appreciated against the Brazilian real by a whopping 54%, against the Mexican peso by 23%, and the Canadian dollar by 15%. Other reasons for the pullback include slowing global economic growth and tighter capital controls in China, NAR also said. Now back to FIRPTA. The strong US dollar will blunt foreign investment in US property, despite the expanded rules, Glenn Mueller, a university professor and the real estate investment strategist at the Denver, Colo.-based Dividend Capital Group. Back of the envelop calculations, Mueller told GlobeSt.com, suggests that Canadian investors in US property would repatriate about 15% less proceeds under the current Canadian-US exchange rate even taking into account FIRPTA’s relaxed tax requirements.