FIRPTA real estate tax reform continues its momentum with the recent release of bill text for H.R. 2128, the latest House bill introduced by Kevin Brady (R-Texas) and J Crowley (D-NY). In connection with the filing of the bill, Brady stated that H.R. 2128 is similar to the changes approved by the Senate Finance Committee and that he has previously proposed, but will now include a provision (like that supported by the Senate Finance Committee and the President) to eliminate the FIRPTA tax on foreign pension plans investing in U.S. real estate. The hope is that this will unlock material off-shore capital that could help fund infrastructure investments. Given the significant, bi-partisan support for these FIRPTA revisions in both houses of Congress and the Administration, we are optimistic that this is moving forward and on a possible path to enactment.

The bill defines a foreign pension plan qualifying for the proposed exemption to include any foreign pension plan or any other entity wholly-owned by a foreign pension plan. For this purpose, a foreign pension plan must (a) be organized under the law of a country other than the U.S., (b) provide benefits to present or former employees or their designees, (c) not have any single 5% participant or beneficiary, (d) be subject to governmental regulation and tax reporting in the country where established or organized, and (e) either (i) provide the employee with a tax deduction, exemption or reduced rate of tax for contributions, or (ii) be itself taxable on a deferred basis or at a reduced rate of tax.

The bill would also increase from 5% to 10% the maximum percentage that foreign holders of interests in publicly-traded REITs may hold and still qualify for exemption of REIT distributions and gain on sale of REIT stock from U.S. FIRPTA taxation. Further, the draft bill also tightens the definition of “domestic control” for REITs. This is relevant because of the FIRPTA tax exemption for the sale of stock in a domestically controlled REIT.  The bill provides certain look through rules in determining whether an upper-tier REIT is consider domestic or foreign for purposes of testing domestic control over the lower-tier REIT.