Senate Finance Committee Proposes FIRPTA Reform

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Today was an important step in moving forward US tax reforms to encourage international investment in U.S. real estate.  The Senate Finance Committee passed 17 different tax bills for consideration by the entire Senate.  This package includes a FIRPTA reform bill sponsored by Senators Robert Menendez (D-NJ) and Michael Enzi (R-WY) to reduce the burden of the Foreign Investment in Real Property Tax Act (FIRPTA) for shareholders of public traded REITs.  The proposal would increase the amount of public REIT stock an investor could hold from five percent to 10 percent without running afoul of FIRPTA.  Although this concept is only a subset of past FIRPTA reform proposals such as S. 1181 and H.R. 2870 (from the last Congress), the associated oral testimony suggested a strong push to further expand the relief for international investors in real estate.  Specifically, testimony noted the goal of exempting international pension funds from FIRPTA, similar to that proposed in the President’s budget proposals in recent years (see page 91 of the FY 2016 Greenbook).

The proposed legislation also contains related technical provisions.  These include a specific definition of “domestically controlled” that clarifies when a REIT is domestically controlled for purposes of the exception applicable to the sale of stock in domestically controlled REITs.  This definition limits the cases where an upper-tier REIT or RIC is treated as a domestic entity for purposes of determining whether a lower-tier REIT is domestically controlled and would be effective upon enactment (no grandfathering).  To achieve revenue neutrality, the following new provisions are also included: (1) increasing FIRPTA withholding on gross proceeds from 10 percent to 15 percent; (2) requiring tax return and shareholder disclosure of US Real Property Holding Company status, (3) requiring FIRPTA withholding by brokers; (4) disallowing the “cleansing rule” for RICs or REITs (this rule allows corporate blockers to “cleanse” their FIRPTA taint by selling the real estate in a taxable sale prior to liquidation); and (5) providing that dividends derived from RICs and REITs would be ineligible for the rule that allows dividends from certain foreign corporations to be eligible for the dividends received deduction.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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