Real Estate Revitalization Act of 2010

A relatively obscure piece of proposed legislation could have a dramatic impact on foreign investment in U.S. real estate and in REITS - making such investments much more attractive to foreign investors.

Non-U.S. persons are not generally subject to tax on U.S. source capital gains. A major exception to this rule is capital gain resulting from the sale of U.S. real estate, which is subject to tax as if it were U.S. effectively connected income, pursuant to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

The Real Estate Revitalization Act would exempt a sale of the stock of a United States real property holding corporation (USRPHC) from such taxation. A USRPHC is a U.S. corporation if the fair market value of its United States real property equals 50% or more of its aggregate value. Under current law, by contrast, interests in such domestic corporations, including real estate investment trusts (REITs), generally could not be sold by non-U.S. persons without imposition of U.S. federal income or withholding taxes

In addition, dividends and liquidating distributions paid by REITs that are attributable to gains derived by the REIT from the sale of US real property would no longer be subject to U.S. federal income tax (or the U.S. federal branch profits tax applicable to non-U.S. corporations) under FIRPTA.

Thus, as currently proposed, the Act would provide significant benefits to non-U.S. persons who invest in U.S. real estate through a U.S. corporation, including a REIT. Investors could sell shares of such entities without U.S. federal income or withholding tax. Moreover, as is currently the case for 5% or lesser investments in public REIT securities, non-U.S. investors would be subject to U.S. federal withholding tax on REIT capital gain dividends and liquidating distributions at ordinary income rates (generally, at a rate of 30% or a lower treaty rate). Certain classes of investors, such as foreign pension funds in designated treaty jurisdictions and sovereign wealth funds, would be exempt from U.S. federal income and withholding taxes on REIT capital gain dividends and liquidating distributions, provided that certain requirements are met.

It is unclear whether this Act will be enacted into law. It does not appear in the most recent Reid Bill.