United States

PATH act increases tax benefit of foreign investment in US real estate

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Foreign investors are generally not subject to Federal tax on the sale of nonbusiness property in the United States. An exception exists for U.S. real estate and other interests in U.S. real property. Under a law known as FIRTPA, the Foreign Investment in Real Property Tax Act, gains from the sale of direct or indirect interests in U.S. real estate or real property may be taxed—even though the rental income from such property may not be subject to tax because the endeavor does not constitute a “business.”

There are a variety of complex exemptions and exclusions from FIRPTA. The recently enacted Protecting Americans From Tax Hikes (PATH) Act modified and expanded the exemptions and exclusions. As a result, as summarized in this chart, certain foreign investors may find investments in U.S. real estate or real-estate related activities more attractive than before, if the can fit into one of the new or enlarged exceptions or exclusions and thereby exempt their gains from U.S. taxation.

This chart may be particularly helpful in comparing alternative investment opportunities, inasmuch as different rules may apply depending on whether a particular investment is a direct investment in real estate, an investment in a partnership holding real estate, or an investment in a Real Estate Investment Trust (REIT). In addition, there are U.S. taxes other than FIRPTA that must be considered, including taxes on income that “effectively connected” with a U.S. trade or business (ECI income) or taxes on “fixed and determinable annual or periodic” earnings (FDAP).

 

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