United States: PATH Act Creates Changes To FIRPTA And REIT Rules

The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), which was signed into law on December 18, 2015 (the Enactment Date), contains a number of provisions modifying (i) the application of Section 897 (FIRPTA) of the Internal Revenue Code of 1986, as amended (the Code) and (ii) certain tax rules governing Real Estate Investment Trusts (REITs). These provisions are of particular relevance to non-US and other investors in US real estate. Most of the provisions, such as the exemption from tax under FIRPTA for certain non-US pension funds, are taxpayer-friendly; however, some, such as the restriction on REIT spinoffs, are not. The following is a brief summary of a number of the key provisions.



Non-US investors (excluding US citizens and US permanent residents living abroad) generally are not subject to US federal income tax on their US-source capital gains unless any such gain is effectively connected with a US trade or business (ECI) or, if the investor is an individual, such individual has a "substantial presence" (based on day count) in the United States. Notwithstanding this general rule, FIRPTA generally treats gain from the disposition of a "US Real Property Interest" (USRPI) by a non-US investor as ECI, subject to US federal income tax and FIRPTA withholding. In addition, FIRPTA generally treats a distribution from a REIT to a non-US investor as ECI to the extent the distribution is attributable to gain from sales or exchanges by the REIT of a USRPI. The FIRPTA rules are subject to a number of exceptions, certain of which are modified by the enactment of the PATH Act.

Publicly Traded REIT Ownership

Under FIRPTA, the stock in a US corporation that is a so-called "US Real Property Holding Corporation" (USRPHC) (generally, a corporation the preponderance of the assets of which consist of USRPIs) is treated as a USRPI. Investors that do not actually or constructively own more than five percent of certain stock of a publicly traded USRPHC during a specified testing period, however, were not treated as owning a USRPI for purposes of FIRPTA under prior law. The PATH Act increases this limit from five percent to 10 percent with respect to publicly traded REITs, while retaining the five percent limit for other publicly traded USRPHCs.

Additionally, the PATH Act provides an exemption from FIRPTA for certain non-US publicly traded entities resident in US tax treaty jurisdictions (Qualified Shareholders) with respect to both gain from the sale of stock in a REIT and distributions from a REIT attributable to gain from sales or exchanges of a USRPI. This exemption does not apply, however, to the extent that (i) an investor in the Qualified Shareholder is not itself a Qualified Shareholder and (ii) such investor directly or indirectly owns more than 10 percent of the stock in the underlying REIT.

Both of these changes take effect on the Enactment Date and apply to any disposition on and after the Enactment Date and any distribution by a REIT on or after the Enactment Date that is treated as a deduction for a taxable year of such REIT ending after such date.

FIRPTA Exemption for Non-US Pension Funds

The PATH Act provides a new exemption from FIRPTA for certain non-US retirement or pension funds (Qualified Foreign Pension Funds) and for any entity, all of the interests of which are held by a Qualified Foreign Pension Fund. A Qualified Foreign Pension Fund is any trust, corporation, or other organization or arrangement that:

  1. is created or organized under the law of a country other than the United States;
  2. is established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees;
  3. does not have a single participant or beneficiary with a right to more than five percent of its assets or income;
  4. 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, either (a) contributions to it that would otherwise be subject to tax are deductible or excluded from the gross income of such entity or taxed at a reduced rate, or (b) taxation of any of its investment income is deferred or such income is taxed at a reduced rate.

This exemption is intended to provide consistent treatment for non-US pension funds and US pension funds, the latter of which generally are exempt from US federal income tax. Notably, the PATH Act did not extend this favorable treatment either to non-US insurance companies or to non-US sovereign wealth funds, although each such category of investor is, like non-US pension funds, an important source of capital flowing into the US real estate market. Moreover, the extent to which the new exemption applies to certain non-US governmental pension plans and other retirement arrangements benefitting non-US government employees is unclear.

The exemption for non-US pension funds applies to dispositions and distributions after the Enactment Date.

Determination of Domestic Control

Under previous law, gain from the sale of stock of a REIT (and, prior to 2015, of certain Regulated Investment Companies (RICs)) generally was not subject to tax under FIRPTA if less than 50 percent of the value of the entity's stock was held directly or indirectly by non-US persons during a specified testing period. The PATH Act permanently restores this rule for certain RICs retroactively to January 1, 2015.

Furthermore, for purposes of determining whether a stockholder of any class of stock that is regularly traded on an established US securities market is a US or non-US person, the PATH Act provides that a person holding less than five percent of such class is treated as a US person unless the REIT or RIC has actual knowledge that such person is not a US person. The PATH Act also contains rules for determining whether stock in lower-tier REITs (and certain RICs) owned by upper-tier REITs (and certain RICs) should be treated as owned by a US or non-US person. These changes take effect on the Enactment Date and will make it easier for non-US investors to take advantage of the favorable rules applicable to sales of stock in domestically controlled REITs (and RICs).

USRPHC Cleansing Rule with Respect to Qualified Investment Entities

Under previous law, stock of a USRPHC would cease to be a USRPI if the USRPHC did not hold any USRPIs as of the date of a disposition of the USRPHC's stock, and all of the USRPIs previously held by such USRPHC at any time during the shorter of (i) the period of time that the selling shareholder held the USRPHC Stock or (ii) the five-year period ending on the date of the disposition, were disposed of in a transaction in which the full amount of gain (if any) was recognized (or such USRPIs ceased to be USRPIs under this rule). The PATH Act adds a requirement that neither the USRPHC nor any predecessor of the USRPHC has been a RIC or a REIT at any time during the applicable holding period. This additional requirement applies to dispositions made on or after the Enactment Date.

Increased Rate of FIRPTA Withholding

Dispositions of USRPIs by non-US persons generally are subject to US withholding tax. The PATH Act increases this withholding tax rate from 10 percent to 15 percent. However, dispositions are eligible for a 10 percent withholding tax rate where (i) the amount realized for such property does not exceed $1million and (ii) the property is acquired for use by the transferee as a residence. This withholding tax rate increase applies to dispositions of USRPIs beginning 60 days after the Enactment Date.

Please note that amounts withheld under this rule generally are available, as under prior law, to offset the non-US person's US federal income tax liability on gain from the disposition of the USRPI and are eligible for refund to the extent that the amount withheld exceeds such underlying tax liability. As such, the increased withholding tax rate is a measure merely aimed at encouraging compliance with US federal income tax rules and does not represent an actual tax increase.


REIT Spinoffs

In general, a corporation may make a tax-free distribution to its shareholders of stock of a controlled corporation pursuant to Section 355 of the Code, provided that certain requirements are satisfied. Under the PATH Act, such tax-free treatment generally does not apply if either the distributing corporation or controlled corporation is a REIT. However, a distribution may qualify as tax-free if either: (i) both the distributing corporation and controlled corporation are REITs immediately after the distribution or (ii) at all times during the three-year period ending on the date of the distribution, the distributing corporation was a REIT, the controlled corporation was a taxable REIT subsidiary (TRS), and the distributing corporation had direct or indirect control of the controlled corporation under Section 368(c) of the Code. Finally, under the PATH Act, neither a distributing nor a controlled corporation that was not previously a REIT will be eligible to make an election to be treated as a REIT for 10 years following a tax-free spinoff.

This provision was aimed at a number of specific transactions in which corporations that did not qualify as REITs, but owned significant real estate, sought to spin off their real estate assets and benefit from the REIT rules with respect thereto on a going-forward basis.

The foregoing provisions under the PATH Act are effective for distributions on or after December 7, 2015. However, under a special grandfathering rule granting relief to taxpayers who already planned on such transactions, these provisions do not apply to any distributions pursuant to a transaction described in a ruling request initially submitted to the IRS on or before December 7, 2015, provided that the request has not been withdrawn and with respect to which a ruling has not been issued or denied in its entirety as of such date.

Other REIT Provisions

In addition to the rules pertaining to the treatment of REITs under FIRPTA and the restriction on REIT spinoffs, the PATH Act contains a number of highly technical and nuanced REIT-related provisions, an in-depth discussion of which is beyond the scope of this update. These provisions include:

  1. the permanent reduction of the recognition period for the corporate-level tax imposed on a REIT's built-in gains to five years (effective for tax years beginning in 2015);
  2. the reduction in the percentage of total assets that a REIT can hold in securities of TRSs from 25 percent to 20 percent (effective for tax years beginning in 2018);
  3. the expansion of permissible services in which a TRS may engage (effective for tax years beginning in 2016);
  4. the repeal of the so-called "preferential dividend rule" for publicly offered REITs (effective for tax years beginning in 2015);
  5. the expansion of the definition of the term "real estate assets" for purposes of the REIT rules to encompass assets such as certain debt instruments issued by publicly offered REITs and certain personal property leased in connection with real property (effective for tax years beginning in 2016); and,
  6. the inclusion of gain from the sale or other disposition of a non-mortgage debt instrument issued by a publicly offered REIT as qualifying income for purposes of the 95 percent income test (but not for the 75 percent income test) (effective for tax years beginning in 2016).

*          *          *

The PATH Act changes to FIRPTA, including with respect to REITs, contain a number of investor-friendly provisions that have appeared in various bills over the past several years but were not previously thought ever to see the light of day. As such, the PATH Act is of great, positive, significance to non-US investors in the US real estate market. Certain of such investors may want to consider restructuring how they hold their investments so as to enable them to take better advantage of the revised rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.