Amended Rules Govern FIRPTA Dispositions After PATH Act

The IRS issued final regulations (T.D. 9751) in response to the December amendments to the Foreign Investment in Real Property Tax Act (FIRPTA) made by the Protecting Americans From Tax Hikes Act of 2015 (PATH) (part of the Consolidated Appropriations Act, 2016, P.L. 114-113).

The legislation changed the amount of withholding required when foreign taxpayers dispose of investments in foreign real property, added an exception from the tax for investments in U.S. real property made by foreign pension funds, and eliminated an exception from the tax for “cleansed investments” if they were held by foreign real estate investment trusts (REITs) or regulated investment companies (RICs), among other things. Those three provisions are addressed in the final regulations.

Under FIRPTA, gain or loss of a nonresident alien individual or foreign corporation from the disposition of a U.S. real property interest (USRPI) is taken into account as if the nonresident alien individual or foreign corporation were engaged in a trade or business within the United States during the tax year and the gain or loss were effectively connected with that trade or business.

These dispositions were subject to withholding of 10% of the amount realized on the disposition of the interest. PATH increased the withholding amount to 15%, effective for dispositions of USRPIs after Feb. 16, 2016, which is 60 days after enactment. An exception from the increased withholding rate applies to a disposition of property the transferee acquired to use as a personal residence for which the amount realized is more than $300,000 but does not exceed $1 million, for which the rate remains 10%.

Sec. 897(c)(1)(B) contains an exception from the characterization of an interest as a USRPI if the corporation does not hold USRPIs as of the date its stock is sold and the corporation disposed of all of the USRPIs that it held during the applicable testing period in transactions in which the full amount of gain, if any, was recognized (called the cleansing exception). The PATH Act eliminates this exception from the tax if the corporation or its predecessor was a RIC or REIT during the applicable testing period. This provision is effective for dispositions occurring after Dec. 18, 2015, the date of enactment.

The final change to the USRPI rules addressed in the regulations is the addition of an exception for qualified foreign pension funds under new Sec. 897(l). The new section excepts from the FIRPTA rules USRPIs held directly (or indirectly through one or more partnerships) by, or to distributions received from a real estate investment trust by, a qualified foreign pension fund or an entity wholly owned by a qualified foreign pension fund. A qualified foreign pension fund is defined in Sec. 897(l)(2). This change applies to dispositions and distributions occurring after Dec. 18, 2015.

The regulations also change the mailing address for Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, to the address provided in the instructions to the form, which is currently the Ogden, Utah, service center. The new address must be used after Feb. 19, 2016, but there is a transition rule for taxpayers who use the old address, before the IRS will apply any penalties.

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.