Oct 03, 2016
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On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (the “Act” or the “PATH Act”). The PATH Act, in part, modified the application of the Foreign Investment in Real Property Tax Act of 1980 (commonly referred to as FIRPTA).
In general, the term “United State real property interest (USRPI)” means an interest in real property located in the U.S. and any interest in a United States real property holding corporation (USRPHC). The gain or loss from the disposition of such an interest, by a foreign person, is treated as if the gain or loss were effectively connected with the conduct of a U.S. trade or business. Income effectively connected with a U.S. trade or business (known as ECI) is taxed at graduated rates. Long term capital gains, assets held longer than 1 year, that are ECI are taxed at a maximum rate of 20%.
IRC §1445 provides rules for determining the withholding tax applicable to dispositions of a USRPI by a foreign seller. Generally, the transferee (the purchaser) is required to deduct and withhold a tax equal to 10% of the amount realized on the disposition (in general, the selling price). This is not a final tax but a withholding obligation on the purchaser to ensure that taxes are remitted to the IRS before the funds are distributed, out of the country, to the foreign seller. The seller claims the credit (the amount withheld) as a credit when a subsequent U.S. tax return is filed.
Pursuant to IRC §897(c)(3), an interest in a publicly traded USRPHC is not a USRPI if the foreign person did not own more than 5% directly or indirectly during the five-year period ending on the date of disposition (the “Publicly Traded USRPHC Exception”).
Further, pursuant to IRC §897(h), any distribution by a qualified investment entity (QIE) (which includes any real estate investment trust (REIT)), to a foreign shareholder, to the extent the distribution is attributable to gain from the sale or exchange of a USRPI, be treated as gain recognized by the foreign shareholder as if it disposed the USRPI directly unless the distribution is from a publicly traded QIE and the foreign shareholder did not own more than 5% during the one-year period ending on the date of the distribution (the ‘Publicly Traded QIE Exception’).
Under the PATH Act, there are a number of other changes to the FIRPTA rules. The following are some, but not all of the changes to the FIRPTA rules:
Questions? Feel Free to Contact Us: If you have any questions regarding this tax tip or U.S. taxes in general, please call us at (416) 594-9500.
The above information is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of U.S. Treasury Department Circular 230. The contents of this document are intended for general information purposes only.