Significant Changes to U.S. Taxation of REITs and Investments by Non-U.S. Investors in Real Property under the PATH Act

by Proskauer Rose LLP
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On December 18, 2015, President Obama signed into law an omnibus appropriations bill which included the Protecting Americans from Tax Hikes Act of 2015 (the "Act").  In addition to extending or making permanent a number of expiring and expired tax provisions, the Act contains significant changes to U.S. taxation of real estate investment trusts ("REITs") and to the tax consequences relevant to investments by non-U.S. investors in U.S. real property under provisions of the Code commonly known as "FIRPTA." [1] Each of the changes in the Act relating to REITs and FIRPTA are discussed below, and a comprehensive chart summarizing these changes is also included.  Although not all of the changes are favorable to investment in REITs and U.S. real estate, in the aggregate the Act seems likely to facilitate increased foreign investment in REITs and other U.S. real estate assets.

REIT Specific Changes

  1. Restriction on tax-free spin-offs involving REITs

In order to qualify for tax-free treatment under the Code, a spin-off must meet certain requirements, including the requirement that the distributed corporation be engaged in the active conduct of a trade or business.  Prior to 2001, the Internal Revenue Service ("IRS") had been generally antagonistic to claims by REITs, which are intended to be passive investment vehicles, that such entities could qualify as being engaged in an active trade or business for the purposes of this rule.  However, in 2001 the IRS ruled that a REIT could satisfy the active trade or business requirement solely by virtue of functions engaged in with respect to its rental activity.[2]  More recently, the IRS issued a private letter ruling indicating that a REIT with a taxable REIT subsidiary ("TRS") could satisfy the active trade or business requirement by virtue of the active business of its TRS. [3] Subsequently, an increasing number of operating companies attempted to follow the transaction pattern. In such a spin-off transaction, an operating company typically would contribute its real estate assets to a newly formed REIT, and transfer certain assets and operations to a newly-formed TRS of such REIT sufficient to satisfy the active trade or business requirement (which active trade or business would be relatively small in relation to the trade or business remaining in the distributing corporation).  The operating company would then spin off the newly formed REIT in a tax-free transaction, and lease back the real estate from the REIT for its ongoing operations.

Except as described below, the Act limits the use of the above spin-off transaction in two ways. First, the Act disallows tax-free treatment in a spin off if either the distributing corporation or controlled corporation is a REIT. Second, the Act prohibits a taxable corporation that is a party to a tax-free spin off from making a REIT election for a ten-year period beginning on the date of the distribution. The Act does not, however, impact the ability of a REIT to spin off another REIT (e.g., a REIT with a mixed portfolio of hotels and shopping centers would be permitted to spin off the hotel or shopping center portfolio tax-free) or a TRS (e.g., a REIT is still permitted to spin off a long-standing management business) tax-free, so long as, in the latter case, the TRS has been held for at least three years.

The restriction on tax-free REIT spin-offs is effective as of December 7, 2015, other than with respect to taxpayers who already have submitted a ruling request to the IRS on the tax-free treatment of a planned transaction. Furthermore, this change comes just months after the IRS released new guidance significantly limiting the availability of private letter rulings with respect to tax-free REIT spin-offs and expressing concern about tax-free REIT spinoffs.[4] The new guidance focused on transactions utilizing the structure described above (i.e., spin-offs in which the active business in the distributed corporation is relatively small in relation to the size of the active business remaining in the distributing corporation).

  1. Repeal of preferential dividend rule for publicly offered REITs

A REIT is required to distribute 90% of its REIT taxable income on an annual basis. Prior to the changes imposed by the Act, generally a REIT is allowed to deduct distributions from its taxable income unless such distribution violates the preferential dividend rule. A distribution is a preferential dividend unless the distribution is (i) pro rata, (ii) with no preference to any share of stock as compared with other shares of the same class and (iii) no preference to one class of stock as compared with another class except to the extent that the former is entitled (without reference to waivers of their rights by stockholders) to a preference. Irrespective of whether the violation is inadvertent or de minimis, the deduction is disallowed, subjecting that income to corporate income tax. Disallowed deductions increase the REIT's taxable income, requiring the REIT to increase its distributions to meet the 90% distribution requirement. If a REIT fails to distribute 90% of its income, then it could lose its status as a REIT for U.S. federal income tax purposes and therefore be subject to corporate income tax. The Act repeals the preferential dividend rule for publicly offered REITs effective for distributions made in tax years after December 31, 2014. A publicly offered REIT is a REIT that is required to file annual and periodic reports with the Securities and Exchange Commission.  As such, privately held REITs will still be subject to the preferential dividend rule. The Act conforms the applicability of the preferential dividend rule to the rule in the regulated investment company ("RIC") context (the preferential dividend rule was repealed for publicly offered RICs in 2010).

  1. Authority for alternative remedies for private REITs to address certain REIT distribution failures

The Act grants the IRS authority to provide an appropriate remedy for violations by private REITs of the preferential dividend rule that were inadvertent or resulting from reasonable cause for tax years beginning after December 31, 2015. 

  1. Reduction in percentage limitation on assets of REIT which may be TRSs

Generally, a REIT cannot own more than 10% of the value of a single entity. There is an exception for TRSs whereby up to 25% of a REIT's assets can be composed of securities of one or more TRSs. The Act restores the percent limitation to 20%, which was the limitation prior to 2008.[5] This reduction could significantly impact REITs that rely heavily on their TRSs to own assets and conduct activities that the REIT cannot do on its own. The reduced percentage limitation is effective for taxable years beginning after December 31, 2017.

  1. Prohibited transaction safe harbors

A REIT is subject to a 100% prohibited transactions tax on the sale of property held as inventory or primarily for sale to customers in the ordinary course of its business. However, if a sale meets the requirements of a safe harbor provision, including a requirement that the REIT (i) does not make more than seven sales of property during the year, or (ii) (a) the aggregate adjusted tax basis of property sold during the year does not exceed 10% of the aggregate tax basis of all of the REIT's assets as of the beginning of the year, or (b) the fair market value of property sold during the year does not exceed 10% of the fair market value of all of the REIT's assets as of the beginning of the year, then the prohibited transaction tax does not apply.[6] The Act provides an alternative methodology for satisfaction of this requirement, whereby the requirement can be satisfied if (i) the aggregate adjusted basis or fair market value of the property sold in the taxable year is not more than 20% of the aggregate basis or fair market value of all of the REIT's assets and (ii) the average adjusted basis percentage or average fair market value over the preceding three-year period is not more than 10% of the aggregate basis or fair market value of all of the REIT's assets.  The alternative methodology may allow a REIT with a large portfolio of assets to sell more of its assets in a single year without being subject to the risk of a prohibited transaction tax than under pre-Act law.  This expansion of the safe harbor provision is effective for taxable years beginning after December 31, 2015.

  1. Limitations on designation of dividends by REITs

A REIT can pass through the character of the income it earns to its shareholders. As such, a shareholder who receives a capital gains or qualified dividend is taxed at capital gain rates. Effective for distributions in tax years beginning after December 31, 2014, the Act limits the total amount of dividends that can be designated by a REIT as qualified dividends or capital gains dividends to the dividends actually paid by the REIT.

  1. Debt instruments of publicly offered REITs and mortgages treated as real estate assets

In order to qualify as a REIT for tax purposes, a REIT must meet, among other tests, the 75% asset test, 75% income test and 95% income test. To satisfy the 75% asset test, 75% of the value of the assets must be real estate assets (such as real property, interests in real property, mortgages on real property (or interests therein) and shares in other qualified REITs), cash or cash items, and government securities. A REIT also must satisfy the 75% income test, whereby 75% of the REIT's gross income must be derived from certain real estate sources, such as rents from real property, interest in obligations secured by real property (or interests in real property), gain from the sale of real property (including from the sale of an interest in real property or an interest in a mortgage on real property), and dividends from or gains from the sale of qualified REITs. The 95% income test requires that 95% of a REIT's gross income be derived from items that are included under the 75% income test and certain other types of passive income, such as dividends, interest, and gain from the sale or disposition of securities (that are not dealer property). Under pre-Act law, debt instruments of publicly offered REITs and interests in mortgages on interests in real property were not qualifying assets under the 75% asset test and income from such assets was not qualifying income under the 75% income test (although such income did qualify generally under the 95% income test). Effective for tax years beginning after December 31, 2015, debt instruments issued by publicly offered REITs and interests in mortgages on interests in real property will be qualifying assets for purposes of the 75% asset test. However, income from debt instruments of publicly offered REITs will not qualify for the 75% income test unless the income qualified for the 75% income test under pre-Act law and does not account for more than 25% of a REIT's assets by value.   The amount of such publicly offered REITs' debt instruments generally is limited to 25% of a REIT's gross assets.

  1. Asset and income test clarification regarding ancillary personal property

In general, rents received from the lease of personal property ancillary to real property is treated as rents from real property if the amount of the rent received attributable to personal property does not exceed 15% of the total rents received under the lease.  However, such ancillary personal property was not considered real estate for the purposes of the 75% asset test.  The Act conforms the 75% asset test to the 75% income test with respect to leases of personal property. For tax years beginning after December 31, 2015, certain ancillary personal property that is leased with real property will be treated as real property for the purposes of the 75% asset test if the rents attributable to that personal property are treated as rent from real property under the 75% income test. Furthermore, an obligation secured by a mortgage on such property is treated as real property for purposes of the 75% income test and 75% asset test if the fair market value of the personal property is not more than 15% of the total fair market value of the personal property and real property combined.

  1. Hedging Provisions

Income from hedging transactions entered into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowing, made or to be made to acquire or carry real estate assets if properly identified as such, generally are excluded from gross income under both the 75% and 95% income tests. For tax years after December 31, 2015, the Act expands the scope of hedging transactions producing excluded income (when properly identified). The Act excludes from gross income for the purposes of the 75% and 95% gross income tests hedges that primarily manage risk with respect to a prior hedge entered into in connection with property that has been disposed of or liabilities that have been extinguished.

  1. Modification of REIT earnings and profits (E&P) calculation to avoid duplicate taxation

Distributions made by a REIT are treated as dividends by shareholders to the extent of the REIT's current and accumulated earnings and profits ("E&P"). Any distributions made in excess of current and accumulated E&P are treated as a return of shareholder's capital which reduces the shareholder's tax basis for the stock (or a capital gain to the extent the distributions exceed tax basis).  The Act modifies the calculation of E&P in a way that addresses an inconsistency in the calculation of depreciation for E&P purposes and taxable income purposes where a REIT elects to use an accelerated or bonus method of depreciation.  Generally, a REIT electing to use an accelerated or bonus method of depreciation is permitted a larger deduction in its early depreciation years with respect to its taxable income, but not for the purposes of calculating E&P (so that depreciation for E&P purposes in such situations generally is lower in earlier years and higher in later years when compared to REIT taxable income).  Under pre-Act law, in the later depreciation years the REIT would be permitted to reduce its E&P by its depreciation deductions only to the extent of the depreciation allowable in that year for REIT taxable income purposes, effectively disallowing for E&P purposes the amount accelerated for taxable income purposes.  For tax years after December 31, 2015, the Act permits a REIT to fully utilize the larger amount of depreciation available to a REIT for E&P purposes where such depreciation was taken in earlier years for taxable income purposes.

  1. Treatment of certain services provided by TRSs

As described in item 5 above, a REIT is subject to a 100% prohibited transaction tax on the sale of property held as inventory or primarily for sale to customers in the ordinary course of its business.   This rule generally restricts a REIT in its ability to market and develop real property.  In the past, a third-party contractor would have provided these services to a REIT. Effective for tax years beginning after December 31, 2015, a REIT can conduct these marketing property development activities through a TRS without subjecting the parent REIT to a prohibited transaction tax.

With respect to certain property acquired or owned by a REIT that is under foreclosure, a REIT is permitted to elect to treat such property as "foreclosure property" for a specified grace period, which allows a REIT to receive otherwise non-qualifying income or to sell the property without becoming subject to the 100% prohibited transaction tax or endangering its REIT status.  Such a foreclosure election automatically terminates if, more than 90 days after the day on which such property was acquired, the property is used in a trade or business conducted by the REIT other than through an independent contractor from which the REIT derives no income.  Under the Act, a REIT may, through a TRS, operate foreclosure property without causing the property to lose its status as foreclosure property.

The Act also expands the 100% tax on redetermined rents, deductions and interest, where the arrangement between a REIT and its TRS are not on an arm's-length basis, to include redetermined TRS service income, where the services provided by a TRS to, or on behalf of, its parent REIT are not on an arm's-length basis. This change does not apply to service income attributable to services provided to the REIT's tenants.

FIRPTA-Related Changes

  1. Exception for interests held by foreign retirement or pension funds

FIRPTA was enacted by Congress in 1980 in an attempt to ensure that non-U.S. persons did not receive more favorable tax treatment than U.S. persons on the disposition of U.S. real property by imposing at least one level of U.S. income tax on dispositions of U.S. real property by non-U.S. persons. Under FIRPTA, gain recognized by non-U.S. persons from investments in "United States real property interests" (USRPIs) is treated as income effectively connected with the conduct of a U.S. trade or business and is subject to U.S. federal income and withholding tax regardless of whether the non-U.S. person conducts any activity in the United States. Prior to the Act, a non-U.S. person included foreign pension funds or foreign retirement plans.

Under the Act, a "qualified foreign pension plan" will no longer be subject to income or withholding tax under FIRPTA upon the disposition of a USRPI.  For purposes of this rule, a qualified foreign pension plan is defined as any trust, corporation, or other organization or arrangement —

  1. which is created or organized under the law of a country other than the United States,
  2. which is established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (or persons designated by such employees),
  3. which does not have a single participant or beneficiary with a right to more than 5% of its assets or income,
  4. which is subject to government regulation and provides annual information reporting about its beneficiaries to the relevant tax authorities in the country in which it is established or operates, and
  5. with respect to which, under the laws of the country in which it is established or operates, (a) contributions to such trust, corporation, organization or arrangement which would otherwise be subject to tax under such laws are deductible or excluded from the gross income of such entity or taxed at a reduced rate, or (b) taxation of any investment income of such trust, corporation, organization or arrangement is deferred or such income is taxed at a reduced rate.

The Act reduces the disparity in treatment between non-U.S. pension plans and U.S. pension plans investing in U.S. real estate.[7]  The Act specifically indicates the term includes a non-U.S. entity wholly owned by a qualified foreign pension plan (even if located in a jurisdiction other than the jurisdiction of the pension plan). However, there are a number of outstanding issues involving the definition of qualified pension plans, such as the treatment of government-sponsored pension plans.  In addition, the Act does not repeal the applicability of FIRPTA to foreign governments which otherwise are not subject to U.S. tax under a special exemption under the Code.[8]  To the extent a non-U.S. investor receives income from the sale of a USRPI that is attributable to the investor engaging in a U.S. trade or business, such investor will continue to be subject to U.S. tax on income from the sale of a USRPI at the graduated rates generally applicable to U.S. persons.  After the Act, however, where a qualified pension plan makes an election under 882(d) to be taxed on all of its U.S. source income on a net income basis, such pension plan will be exempt from tax on income from the sale of the property except with respect to any depreciation recapture.

  1. Exception from FIRPTA for certain stock of REITs – Expansion of Publicly Traded Exception

Generally, non-U.S. shareholders of certain publicly traded REITs are exempt from tax under FIRPTA on dispositions of REIT stock or on distributions attributable to gain from the sale of a USRPI if such shareholders did not actually or constructively own more than 5% of the REIT's stock during a testing period.[9] The Act increases the ownership threshold for these exceptions from 5% to 10% effective for dispositions and distributions on or after December 18, 2015.

The Act also exempts from tax under FIRPTA dispositions of REIT stock or distributions attributable to gain from the sale of a USRPI held (directly or indirectly through one or more partnerships) by "qualified shareholders."  For this purpose, the term qualified shareholder includes certain foreign publicly traded partnerships or corporations that are qualified collective investment vehicles and that maintain records on the identity of holders of 5% or more of the partnership or corporation's publicly traded class of interests or stock.  However, to the extent an investor holds an interest in a qualified shareholder (other than solely as a creditor) and holds more than 10% of the stock of the REIT (whether through the qualified shareholder or otherwise) (an "applicable investor"), the amount of gain exempt from tax under FIRPTA is reduced proportionally by the percentage of the qualified shareholder held by the applicable investor.  This complex provision is effective as of December 18, 2015.

  1. Exception from FIRPTA for certain stock of REITs – Domestically Controlled Exception

Non-U.S. shareholders of a RIC[10] or a REIT are exempt from tax under FIRPTA on dispositions of RIC or REIT stock if the RIC or REIT qualifies as "domestically controlled." A RIC or REIT is domestically controlled if less than 50 percent in value of its stock continues to be held directly or indirectly by non-U.S. persons during a testing period.  The Act introduces a number of presumptions intended to aid RICs and REITs in determining whether they are domestically controlled.  First, a RIC or REIT shall presume that any person holding less than 5% of any class of its stock that is publicly traded is a U.S. person, unless it has actual knowledge otherwise.  Second, a RIC or REIT shall presume that another RIC or REIT that holds its stock is a U.S. person if (i) such other RIC or REIT is domestically controlled and (ii) any class of stock of such other RIC or REIT is publicly traded (or, in the case of the RIC, it issues redeemable securities); however, if such other RIC or REIT is not domestically controlled, the RIC or REIT shall presume such other RIC or REIT is a non-U.S. person.  Third, any stock in a RIC or REIT held by another RIC or REIT not described in the prior sentence shall be presumed to be held by a U.S. person in proportion to the stock of the other RIC or REIT which is held (or treated as held) by a U.S. person.

  1. Increase in rate of withholding of tax on dispositions of USRPIs

Effective for dispositions occurring after February 16, 2016, the Act increases the rate of FIRPTA withholding from 10% to 15% of the gross proceeds of the sale of a USRPI (including the stock of a REIT). The increased withholding does not apply to the sale of a personal residence where the amount realized is $1,000,000 or less. In such situations the 10% withholding rate continues to apply.

  1. Interests in RICs and REITs not excluded from definition of USRPI under the cleansing rule

An interest in a corporation that is a USRPI generally can be cleansed of its status as a USRPI if it disposes of all its real estate assets in one or more fully taxable transactions (the so-called "cleansing rule").  Effective for dispositions on or after December 18, 2015 of the Act, a corporation that elects to be taxed as a RIC or a REIT (or elected to be so taxed during a specified look-back period) is no longer eligible for the cleansing rule.

Other Related Changes

  1. Dividends derived from RICS and REITs ineligible for deduction for U.S. source portion of dividends from certain foreign corporations

U.S. corporations generally are entitled to deduct from their taxable income any dividends received from a foreign corporation only to the extent that the dividend is attributable to (i) income effectively connected with a trade or business, or (ii) a dividend received (directly or indirectly through a wholly-owned foreign corporation) from an 80% or more controlled U.S. corporation.  The dividends received deduction is intended to alleviate the double taxation that occurs when dividend income is recognized relating to dividends from a corporation whose income was subject to U.S. tax. Given that the dividends of a RIC or REIT are deducted against the RIC or REIT's income without that income ever being subject to entity-level tax, the IRS has taken the position that dividends attributable to interest income of a controlled RIC or REIT cannot be considered for the dividends-received deductions. The Act codifies the IRS' interpretation of the eligibility of RIC or REIT dividends for the dividends-received deduction.  On or after December 18, 2015, U.S. corporations no longer are eligible for a deduction for any dividends received from a foreign corporation that is attributable to a dividend received by such foreign corporation from a RIC or a REIT.

  1. Permanent reduction in recognition period for built-in gains tax

In general, a REIT is subject to built-in gains tax if it disposes of property during a specified recognition period that it had obtained from a C corporation in a carryover basis transaction (e.g., the conversion of a C corporation to a REIT or a tax-free merger of a C corporation into a REIT).  This recognition period, which had been 10 years, had been reduced temporarily to 7 years for 2009 and 2010, and 5 years for 2011 through 2014.  Under the Act, the recognition period is reduced permanently to 5 years effective for tax years beginning after December 31, 2014.

Summary of REIT and FIRPTA Reforms in the Act

 

Relevant Provision

Summary

Taxpayers Affected

Effective Date

1. Restriction on tax-free spin-offs involving REITs

Disallows tax-free treatment for spin-offs involving REITs and prohibits parties to a spin-off from making a REIT election for ten years.  Does not restrict the ability of a REIT to spin off another REIT or a long-standing TRS.

REITs (publicly traded, listed non-traded, and private)

December 7, 2015 (other than for taxpayers with a pending ruling request)

2. Repeal of preferential dividend rule for publicly offered REITs

Repeals the preferential dividend rule for publicly offered REITs, which rule disqualifies certain distributions viewed as preferential from counting towards a REIT's 90% distribution requirement.

REITs (publicly traded and listed non-traded)

Distributions made in tax years beginning after December 31, 2014

3. Authority for alternative remedies to address certain REIT distribution failures

Grants the IRS authority to provide an appropriate remedy for inadvertent or reasonably caused violations of the rule

REITs (private)

Distributions made in tax years beginning after December 31, 2015

4. Reduction in percentage limitation on assets of REIT which may be TRSs

Reduces the maximum amount of a REIT's assets which can be comprised of the securities of one or more TRS from 25% to 20%.

REITs (publicly traded, listed non-traded, and private)

Taxable years beginning after December 31, 2017

5. Prohibited transaction safe harbors

Expands the permitted methodologies for application of a safe harbor from prohibited transaction treatment on the sale of inventory property.  Additional methodology allows a REIT to calculate certain relevant safe harbor thresholds using a three-year average.

REITs (publicly traded, listed non-traded, and private)

Taxable years beginning after December 18, 2015

6. Limitations on designation of dividends by REITs

Limits the total amount of dividends that can be designated by a REIT as qualified dividends or capital gains dividends to the dividends actually paid by the REIT.

REITs (publicly traded, listed non-traded, and private)

Distributions made in tax years beginning after December 31, 2014

7. Debt instruments of publicly offered REITs and mortgages treated as real estate assets

 Expands the definition of real estate assets to include debt instruments issued by publicly offered REITs and interests in mortgages on real property for purposes of the 75% asset test and 95% income test.

REITs (publicly traded, listed non-traded, and private)

Taxable years beginning after December 31, 2015

8. Asset and income test clarification regarding ancillary personal property

Expands the definition of real property to include ancillary personal property that is leased with real property if the rents attributable to that personal property are treated as rent from real property under the 75% income test.

REITs (publicly traded, listed non-traded, and private)

Taxable years beginning after December 31, 2015

9. Hedging provisions

 Expands the scope of hedging transactions excluded from gross income for the purposes of the REIT income tests to include hedges entered into to manage mistakes associated with property that has been disposed of or liabilities that have been extinguished.

REITs (publicly traded, listed non-traded, and private)

Taxable years beginning after December 31, 2015

10. Modification of REIT earnings and profits (E&P) calculation to avoid duplicate taxation

Disallows a reduction in the current E&P by any amount that is not allowable in calculating taxable income for the tax year or was not allowable in calculating taxable income for any previous year. 

REITs (publicly traded, listed non-traded, and private)

Taxable years beginning after December 31, 2015

11. Treatment of certain services provided by TRSs

Permits (i) the development and marketing of real property by a TRS without subjecting the REIT to the prohibited transaction tax and (ii) the operation of foreclosure property by a TRS without causing the loss of foreclosure property status.  Expands the 100 percent excise tax to include income from services provided by a TRS to its parent REIT that are not arm's-length.

REITs (publicly traded, listed non-traded, and private)

Taxable years beginning after December 31, 2015

12. Exception for interests held by foreign retirement or pension funds

Exempts qualified foreign pension plans from FIRPTA tax.

Qualified foreign pension plans investing in USRPIs

Distributions and dispositions after December 18, 2015

13. Exception from FIRPTA for certain stock of REITs – Expansion of Publicly Traded Exception

Increases from 5 percent to 10 percent the maximum stock ownership a non-U.S. investor may hold in a publicly traded REIT to avoid FIRPTA tax upon receipt of capital gain dividends or disposition of such stock.

Non-U.S. investors in REITs

Taxable years beginning after December 31, 2015

14. Exception from FIRPTA for certain stock of REITs – Domestically Controlled Exception

Provides new presumption rules to aid REITs in determining whether their stock is domestically controlled.

Non-U.S. investors in REITs

Taxable years beginning after December 31, 2015

15. Increase in rate of withholding of tax on dispositions of USRPIs

Increases the rate of withholding on dispositions of USRPIs from 10% to 15% of the gross proceeds of the sale.

Non-U.S. investors in USRPIs

Dispositions occurring after February 16, 2016

16. Interests in RICs and REITs not excluded from definition of USRPI under the cleansing rule

Excludes interests in RICs and REITs from eligibility for a cleansing rule, whereby a corporation can terminate its status as a U.S. real property interest by selling all its U.S. real property assets in a taxable transaction.

Non-U.S. investors in RICs and REITs

Dispositions on or after December 18, 2015

17. Dividends derived from RICS and REITs ineligible for deduction for U.S. source portion of dividends from certain foreign corporations

Excludes dividends from a non-U.S. subsidiary attributable to dividends from a RIC or a REIT from eligibility for a dividends-received deduction.

U.S. corporations with a non-U.S. subsidiary, which subsidiary owns stock in a RIC or a REIT

Dividends on or after December 18, 2015

18. Permanent reduction in recognition period for built-in gains tax

Permanently reduces recognition period for built-in gains tax to 5 years

U.S. corporations holding appreciated property that have converted or will convert to REIT status and REITs acquiring appreciated property from a U.S. corporation in a carryover basis transaction

Taxable years beginning after December 31, 2014



[1] References herein to the Code are to the Internal Revenue Code of 1986, as amended.

[2] Rev. Rul. 2001-29, 2001-1 C.B. 1348.

[3] PLR 201337007.  A private letter ruling may be relied upon only by the taxpayer to which it is issued.  However, private letter rulings provide some indication of administrative practice.

[4] Notice 2015-59 and Rev. Proc. 2015-43.

[5] The limitation was increased to 25% pursuant to the 2008 Housing Act.

[6] In general, the prohibited transactions safe harbor consists of the following requirements (with certain exceptions for foreclosure property), each of which must be met: (i) the REIT must have held the property for not less than two (2) years; (ii) the aggregate capitalized expenditures on the sold property during the two years prior to its sale do not exceed 30% of the net selling price for the property; (iii)(I) the REIT does not make more than seven (7) sales of property during the year, or (II) the aggregate adjusted tax basis of property sold during the year does not exceed 10% of the aggregate tax basis of all of the REIT's assets as of the beginning of the year, or (III) the fair market value of property sold during the year does not exceed 10% of the fair market value of all of the REIT's assets as of the beginning of the year; (iv) property, which consists of land or improvements, has been held by the REIT for the production of rental income for not less than two (2) years; and (v) if the requirement of (iii)(I) above is not met, substantially all of the marketing and development expenditures with respect to the property were made by an "independent contractor" (as defined for REIT purposes) from whom the REIT does not derive or receive any income. 

[7] Non-U.S. pension plans may even be at an advantage to U.S. pension plans investing in U.S. real estate as non-U.S. pension plans generally are not subject to taxation in the U.S. on their unrelated business taxable income, which income may be generated by U.S. pension plans from investments in U.S. real property that are debt financed.

[8] See Section 892; Treas. Reg. Sec. 1.892-3T.

[9] Shareholders of a publicly traded corporation that is subject to FIRPTA as a "United States real property holding corporation," but which has not elected to be taxed as a REIT, are not eligible for this exception.

[10] The Act restores the application of this rule to RICs for tax years beginning after January 1, 2015 and makes such restoration permanent.

[View source.]

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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This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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