Locke Lord QuickStudy: Tax Code Amendments Proposed to Facilitate Foreign Investment in REITs and U.S. Commercial Properties

On April 30, 2015, Representatives Kevin Brady (R-TX) and Joe Crowley (D-NY), both members of the U.S. House Ways & Means Committee, introduced legislation intended to encourage foreign investment in United States real estate. The bill (H.R. 2128) would amend the Foreign Investment in Real Property Tax Act of 1980 (known as “FIRPTA”). Generally, FIRPTA requires foreign taxpayers to file and pay income tax on the gain resulting from a disposition of an United States real property interest (“USRPI”). To promote tax compliance, sellers of USRPIs are required to withhold ten percent (10%) on gross proceeds. For purposes of FIRPTA, a USRPI includes any interest, other than solely as a creditor, in real property located in the United States or the U.S. Virgin Islands and interests, other than solely as a creditor, in certain domestic corporations that hold significant amounts of USRPI, known as United States real property holding corporations (“USRPHC”). A domestic corporation generally is presumed to be a USRPHC and, consequently, a sale of USRPHC stock by a foreign person is subject to FIRPTA withholding taxation unless it is established prior to the sale that the corporation was at no time a USRPHC during the 5-year period ending on the date of disposition or unless the seller timely obtains from the Internal Revenue Service a FIRPTA withholding exemption certificate.

The bill includes two significant and long-lobbied for changes to the current taxation scheme imposed under FIRPTA. First, the bill would expand the current FIRPTA exemption available to certain shareholders of publicly-traded corporations. Real estate investment trusts (“REITs”), including publicly-traded REITs, typically constitute a USRPHC based on their asset composition. Consequently, the disposition of a REIT interest may be subject to taxation and withholding under FIRPTA unless otherwise exempted. FIRPTA currently exempts certain classes of publicly-traded stock of a domestic corporation from the definition of a USRPI if held by a person who did not own (directly or constructively) more than five percent (5%) of that class of stock. The proposed bill would double the current FIRPTA tax exemption for foreign shareholders in publicly-traded REITs from the current five percent (5%) threshold to a ten percent (10%) threshold. In addition, the bill would completely exempt foreign pension funds investing in United States commercial real estate from FIRPTA taxation.

By expanding these FIRPTA exemptions, the bill promotes investment in United States real estate. Specifically, by enlarging the current FIRPTA exemption in the context of REITs, the bill provides advantages to REITs as a tax-preferred vehicle for investment in United States real estate. Accordingly, based on the current positive investment climate and the congressional preference demonstrated by the bill, REITs could become a more popular vehicle for United States real estate investments by foreign taxpayers.

For more information on the matters discussed in this Locke Lord QuickStudy, please contact the author.