Dividends from capital gain and liquidating distributions paid by REITs to non-U.S. shareholders are commonly treated as the sale of U.S. real property interests, and therefore, as effectively connected income under FIRPTA. President Trump’s H.R.1, commonly referred to as the Tax Cuts and Jobs Act, reduced the FIRPTA withholding rate on these types of distributions from 35 percent to the highest corporate tax rate in effect for the taxable year, which is now 21 percent.
How much does FIRPTA allow a foreign group to invest in a U.S. REIT?
I work for an asset management company that is expanding into the United States later this year. We are looking into the FIRPTA requirements for our investment into a well-known REIT based in New York City. It’s going to impact our decision since FIRPTA affects prices at which REITs can buy and sell properties and we’re seeking professional advice, but we appreciate your opinions as you have experience in helping foreign investors enter the market.
The Foreign Investment in Real Property Tax Act was enacted to tax a gain that a non-resident alien or foreign corporation derives from the sale or other disposition of stock in a real property holding corporation. However, when the shareholder owns a class of stock that is regularly traded on an established securities market, as long as the shareholder owns less than 5 percent of that class of stock, no tax is payable under FIRPTA. For publicly-traded real estate investment trusts the shareholder can own up to 10 percent. More recently, laws have been enacted to give special treatments to pension funds or entities owned by pension funds.
That generally depends on whether the REIT itself is considered as a domestic REIT. As a foreign investor, disposition of domestic REIT shares is generally not subject to FIRPTA. A domestic REIT is generally 50% or more owned by US investors.