Mon, Mar 23, 2015

http://www.newsmax.com/finance/deniskleinfeld/us-real-estate-tax-money/2015/03/23/id/631873/

Money has been pouring into the U.S. real estate market from all over the world. The prices being paid by these foreign investors have been a windfall to U.S. property owners who have been reaping the benefit of a world in financial chaos looking for an investment safe haven. (My view is that the world is a real crappy neighborhood, but the U.S. is the best house in that crappy neighborhood.)

China and Russia, to name but two, are falling down. One consequence is that thousands of Chinese and some Russians are buying their way into U.S. citizenship by paying $500,000 plus fees, cost and commissions through what is known as the EB-5 Program. Most of the qualifying investments under this "Buy-Yourself-A-U.S. Citizenship" program are real estate investments. The money is in U.S. dollars almost invariably paid by wire transfer through U.S. financial institutions.

These are not the traditional real estate deals where leverage is used. These deals are cash. Every day, newspapers and newsletters widely report that major transactions by foreigners take place, even on an individual investor level, for millions of dollars without there being any mortgage financing.

Miami, New York and San Francisco, for example, all report very low levels of mortgage applications, yet the property prices are zooming. I can tell you from first-hand knowledge that Miami is experiencing a spectacular building boom as well as a hot existing commercial and residential market.

Personally, I am delighted to see all this money coming into the United States rather than going elsewhere. The American economy needs — in fact, is dependent on — capital from foreign sources.

The U.S. tax laws are designed by Congress to encourage foreign investment.

This is all coming under scrutiny by the government as possible money laundering, which is highly illegal under the Patriot Act.

Within about six weeks after 9/11, Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act).

This amended the Bank Secrecy Act (or as some call it the Bank Surveillance Act) to give the government vast tools to prevent, detect and prosecute international money laundering as well as the financing of terrorism.

Money laundering is now thought to include tax crimes. A surprising Supreme Court case seemingly makes the violation of a foreign country's tax law a possible felony offense in the United States.

Specifically Section 352 of the Patriot Act applies to real estate settlements and closings.

As might be expected, while the real estate industry is against money laundering and, of course, terrorism, it does not like it when any restrictions impact their fees and commissions.

Given the political clout of the real estate industry, the Treasury in 2002 and again in 2006 temporarily exempted certain financial institutions, including people doing real estate closings and settlements, from the requirement of establishing an anti-money laundering program.

In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA), which imposed a detailed and extraordinarily complex disclosure regimen on the entire global financial industry. The goal was to catch U.S. taxpayers who have foreign accounts and were not paying taxes on those accounts.

To make this work in practice, the Treasury created something called an intergovernmental agreement (IGA). Under various forms of IGAs, there were several model agreements. Many of these require the United States to provide the same detailed information and due diligence of ultimate beneficial ownership to the foreign country as the United States was demanding it get from them.

And that's where things sat for the last five years. The temporary exemption for real estate closings and settlements essentially kept the real estate industry out of the focus of the Patriot Act as well as numerous other criminal laws, including tax.

Now the Treasury's Financial Crimes Enforcement Network (FinCEN) announced that this is all under review because of a letter to the Treasury requesting the real estate exemption of the Patriot Act be ended.

As one spokesman commented, "The United States should not be providing a red carpet for dirty money."

How much of the money coming here was the result of the tax evasion in a foreign country? Who are these foreign buyers and what is the source of their money?

Clearly, the Achilles' heel of the recovery of the U.S. real estate industry is the possibility that billions of illegal dollars from around the world is being laundered through U.S. real estate and things like the EB-5 program.

It poses a danger to be sure, but then again, in a perverse way, it might just present itself as an opportunity for U.S.-based investors.