Proposed changes to the U.S. taxation of foreign investment in U.S. real property

December 14, 2015

On December 7, 2015, the Chairman of the U.S. House Committee on Ways and Means, Representative Kevin Brady, proposed an amendment to H.R. 34, The Tax Increase Prevention and Real Estate Investment Act of 2015 (the Extenders Bill) that would retroactively extend, for two years (generally through the end of 2016), a number of tax relief provisions that had previously expired at the end of 2014.

Included in Title II - Other Revenue Provisions of the Extenders Bill are certain proposed modifications to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), provisions that have been incorporated into the Internal Revenue Code by virtue of which non-U.S. persons are generally subject to U.S. federal income tax on gains from investments in U.S. real property interests, including, for example, stock of U.S. real property holding corporations (USRPHCs).

Generally speaking, equity interests in real estate investment trusts (REITs) are considered USRPHCs, such that non-U.S shareholders of REITs are subject to the FIRPTA tax. However, there is currently an exception that allows any class of USRPHC stock (including that of a REIT) that is publicly traded to be exempted from FIRPTA taxation, provided ownership by the non-U.S. shareholder (whether directly, indirectly or constructively held) does not exceed a 5 percent threshold.

Section 213 of the Extenders Bill would increase the maximum stock ownership a shareholder may hold in a publicly traded stock to avoid being subject to the FIRPTA tax to 10 percent. Moreover, Section 214 of the Extenders Bill would exempt foreign retirement and pension funds from FIRPTA taxation.

These proposed amendments, if passed as presently drafted, would apply after the legislation itself is enacted.

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