Senate tax writers move to ease FIRPTA restrictions on REITs

US Capitol BuildingThe Senate Finance Committee has unanimously approved a bill that would ease restrictions under the Foreign Investment Real Property Tax Act of 1980 (FIRPTA) for investments in real estate investment trusts (REITs).

The legislation is meant to remove barriers to foreign investment in U.S. real estate. Major changes would increase the percentage of REIT stock a foreign shareholder could hold to 10% before FIRPTA withholding was applied to dividends and stock sales. The legislation would also loosen the rules for determining whether a REIT was domestically controlled and the sale of its stock was exempt from FIRPTA.

The FIRPTA legislation was included in a package with 16 other noncontroversial bills approved by the Senate Finance Committee on Feb. 11. Senate Finance Committee Chair Orrin Hatch, R-Utah, and ranking minority member Ron Wyden, D-Ore., required all the bills to be bipartisan and revenue neutral in the hope they could easily pass the Senate before the committee turns to comprehensive tax reform. Hatch and Wyden pledged to urge Senate leaders to consider the bills on the Senate floor.

Despite the bipartisan support for and noncontroversial nature of the provisions, there are many hurdles to enactment. It’s difficult to move tax bills through the Senate because they typically attract problematic amendments. In addition, Senate leaders have not pledged to take up the bills, and House tax writers haven’t said whether they’re interested in the bills.

The following discusses the REIT legislation in more detail.

5% shareholders and domestic control FIRPTA generally provides that gain from selling U.S. real estate held by foreign taxpayers is effectively connected to the United States and is subject to 10% withholding. If the sale is made through a REIT, withholding on the distribution of the proceeds to a foreign shareholder is 35%. In addition, the stock of a corporation that holds more than 50% of its real estate in the United States (a U.S. real property holding company or USRPHC) is considered U.S. real estate for FIRPTA purposes, and the sale of the stock by foreign shareholders is generally subject to FIRPTA.

Important exceptions apply to REITs. A foreign investor that holds 5% or less in a publicly traded corporation is exempt from FIRPTA on distributions and sale of the stock. The legislation would increase the threshold to 10% for REITs.

In addition, if at least 50% of REIT stock is held by U.S. shareholders, it’s considered “domestically controlled” and the sale of the stock is also exempt from FIRPTA. The legislation would relax the rules for determining when a REIT was domestically controlled by creating a presumption that any holder of less than 5% of the stock was a U.S. person unless the taxpayer had actual knowledge regarding the stock ownership.

Increased withholding rate and new reporting requirements While the legislation would make it easier for foreign shareholders to own REIT stock without being subject to FIRPTA withholding, it would also increase the general withholding rate from 10% to 15%. The current 10% rate would be retained for sales of personal residences of less than $1 million.

The legislation would also add new reporting requirements. Any corporation that held more than 50% of its real estate in the United States and was considered a USRPHC would be required to disclose this information in various ways, including on Form 1099s. Without such reporting, however, qualified investment entities could assume the entity was not domestically controlled and the sale of stock was not subject to FIRPTA.

Brokers would be required to withhold at the new rate of 15% for any sales of a USRPHC in which a foreign shareholder that holds more than 5% of stock (10% for REITs). Finally, dividends from regulated investment companies and REITs would not be eligible for the dividends-received deduction under Section 245.

Dustin Stamper
+1 202 861 4144

Tanya Thomas
+1 703 847 7541

Tax professional standards statement
This document supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document, we encourage you to contact us or an independent tax adviser to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this document is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.