On September 21, 2011, House Representative Kevin Brady (R. Texas) introduced a bipartisan bill (H.R. 2989) entitled the “Real Estate Jobs and Investment Act of 2011.”1 The bill would amend the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), which generally taxes non-U.S. individuals and corporations, at the same rates applicable to U.S. taxpayers, on gain from the disposition of U.S. real property interests (“USRPIs”), including stock in a U.S. corporation if at least 50 percent of the corporation’s assets consist of USRPIs. A similar bill (S. 1616), the text of which has not yet been released, was introduced in the Senate by Senator Robert Menendez (D. New Jersey) on September 22, 2011. The House bill would make three major changes to FIRPTA that would ease restrictions and expand certain exceptions with the goal of making investing in U.S. real estate more attractive to non-U.S. investors.

  • First, FIRPTA generally provides that corporate stock that is regularly traded on an established securities market is not treated as a USRPI (and its disposition is therefore not subject to FIRPTA) in the case of a person who has held 5 percent or less of such stock at all times during the preceding 5 years. The House bill would expand this exemption to a person who, at all times during the preceding 5 years, has held 10 percent or less of the stock in a real estate investment trust (a “REIT”) that is regularly traded on an established securities market.

In addition, the House bill introduces the concept of a “qualified shareholder,” meaning a non-U.S. shareholder that would be eligible for treaty benefits with respect to ordinary dividends paid by a REIT, whose principal class of interests is listed and regularly traded on a recognized stock exchange (as defined in such treaty). Under the House bill, REIT stock held by a qualified shareholder (even if greater than 10 percent) would not be treated as a USRPI except in the case of an investor in the qualified shareholder that holds (directly or through the qualified shareholder) more than 10 percent of such REIT stock.

  • Second, under FIRPTA’s look-through rule, distributions made by a REIT to a non-U.S. shareholder or upper-tier REIT, to the extent attributable to gain from the disposition by the REIT of a USRPI, are generally treated as capital gain distributions subject to FIRPTA; however, distributions to shareholders that do not own more than 5 percent of a class of stock that is regularly traded on a U.S. established securities market at any time during the preceding year are excepted from this treatment. The House bill would expand this exception to (i) a non-U.S. shareholder who has held 10 percent or less of regularly traded REIT stock during the preceding year and (ii) a qualified shareholder (as described above). In addition, the House bill provides that certain REIT distributions that are treated as a sale or exchange of REIT stock, including REIT liquidating distributions, are not subject to the look-through rule. This provision would reverse recent IRS guidance treating such distributions as capital gain distributions subject to FIRPTA.
  • Third, under FIRPTA, an interest in a “domestically controlled REIT” is not a USRPI. In determining whether a REIT is domestically controlled, the House bill would allow the REIT to presume that stock held by a holder of less than 5 percent of a class of stock traded on a U.S. established securities market is held by a U.S. person throughout the relevant testing period, unless the REIT has actual knowledge to the contrary. The House bill also provides that any stock in a REIT that is held by another REIT would be treated as held by a non-U.S. person unless such upper-tier REIT is domestically controlled.  

IRS Circular 230 Disclosure

Any U.S. tax advice herein (or in any attachments hereto) was not intended or written to be used, and cannot be used, by any taxpayer to avoid U.S. tax penalties. Any such tax advice that is used or referred to by others to promote, market or recommend any entity, plan or arrangement should be construed as written in connection with that promotion, marketing or recommendation, and the taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.