There are many foreign investors, including individuals and corporations, who invest in the U.S. real estate market. There are several taxation provisions that govern the sale of foreign-held investment properties. The Protecting Americans from Tax Hikes Acts of 2015 (PATH) contains provisions which direct how real estate profits are taxed, and created exceptions when the seller is a foreign person or company. PATH has effects on the exceptions under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), including a method for escaping tax when selling real estate owned by foreign pension funds through real estate investment trusts (REITs).
In general, foreign individuals and corporations pay tax on income that is “effectively connected” with business or trade in the U.S., or when the income stems from dividends, rents, or royalties from U.S. sources, termed “fixed or determinable, annual or periodical” income. When a foreign person sells an interest in U.S. real estate, often the profit is deemed as “effectively connected” income. This is most likely because the majority of foreign sellers purchased the real estate interest as an investment, and many sellers are also corporations.
The New York Law Journal reports that with the enactment of PATH, foreign retirement or pension funds which sell property interests may now be able to avoid paying income tax on the profits from such transactions. The new Internal Revenue Code § 897(I) lays out the provision which excludes foreign retirement and pension fund sellers who invested through a REIT structure from being taxed on profits as “effectively connected” income under FIRPTA. This is true regardless of whether after the sale of the real estate interest, the REIT is liquidated for profits. What’s more, if the foreign pension fund was structured to meet the requirements set out in § 892, it could be considered a “sovereign” and avoid taxes on both the sale of the real estate interest and on ordinary investment dividends. These tax breaks in totality will encourage foreign investors to purchase and sell domestic real estate interests.
If you are looking to invest in real estate property, or would like to sell your interests for profit, it is important to contact an experienced real estate attorney who can guide you through the process, and protect your legal rights. For more information about the firm’s real estate and taxation practices, contact AGMB at 310-300-2900 for the Los Angeles office, or at 212-201-1170 for the New York office.