The U.S. House of Representatives recently passed the Real Estate Jobs and Investment Act of 2010 (the "Act"), proposing certain changes to Section 897 of the U.S. Internal Revenue Code (the "Code") regarding the taxation of foreign investment in U.S. real property. Before the Act can become law, it needs to be passed by the U.S. Senate and signed by the President. Given recent disagreements between the House and the Senate over several tax bills, the likelihood and timing of any action by the Senate is uncertain and it is difficult to make any predictions about whether the Act will in fact become law.1
Specifically, the Act would amend Sections 897(c)(3) and 897(h) of the Code to increase the threshold for the beneficial treatment available to certain minority shareholders of publicly traded REITs to 10 percent from the current 5 percent. The Act would also extend this beneficial treatment on a look-through basis to minority shareholders of certain publicly traded non-U.S. corporations that in turn own an interest in a U.S. REIT.
Currently, Section 897(c)(3) provides that interests of 5 percent or less in the stock of a publicly traded U.S. corporation will not be treated as a United States real property interest (a "USRPI"), and therefore gain recognized by a non-U.S. shareholder on a sale of the stock will not generally be subject to U.S. tax, provided the stock is regularly traded on an established securities market. The Act would increase this threshold to 10 percent in the case of a publicly traded REIT. In addition, the Act would provide a look-through rule for a non-U.S. corporate shareholder of a U.S. REIT if the shareholder is itself publicly traded and is entitled to treaty benefits with respect to dividends received from the REIT (the Act refers to such a shareholder as a "qualified shareholder"). The look-through benefits would be available to a shareholder who owns 10 percent or less of the qualified shareholder.
The Act would make similar changes to Section 897(h) of the Code to provide that distributions from an REIT that are attributable to a sale of real property by the REIT would not be treated as gains received from a sale of a USRPI with respect to distributions made to a shareholder who owns 10 percent or less (increased from the current 5 percent threshold) of a publicly traded REIT, and with respect to a person that owns 10 percent or less of a "qualified shareholder" of an REIT.
Footnote
1. Sponsored by Congressman Joseph Crowley, the Act appears to replace the Real Estate Revitalization Act of 2010 proposed earlier in the year by Congressman Crowley.
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