Several US tax provisions specific to real estate investing were recently enacted as part of the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act” or “Act”) approved by President Obama in December of 2015. Below are the highlights.
- Currently, the definition of a QFPF applies only with regard to FIRPTA withholding, not necessarily to the classification of a QFPF as a “trust” for US income tax purposes (and thus eligible for the preferential LTCG rate). It will be interesting to see if the Service adopts this as a “per-se” definition of a trust for US tax classification of foreign pension plans and/or if the number of taxpayer classification determination letters requested from the IRS increases as a result.
- For US real estate investment activity that rises to the level of a US trade or business (commercial real estate development and most timberland investments), the REIT vehicle is considerably more appealing now for foreign pension funds meeting the “QFPF” definition. Dividends constituting capital gain and sales of REIT shares are now exempt from both FIRPTA withholding and US income tax. The burden of filing for a refund of FIRPTA over withholding has been removed. The cost of REIT formation and compliance is mitigated by the improved after-tax returns for QFPF investors.
- Private timber REITs are considerably more attractive now for QFPF investors as such REITs generate a high ratio of capital gain dividend relative to other types of REITs.
- For other foreign investors, the FIRPTA withholding is now 50% greater (15% of sales price) than before the PATH Act. The potential for and cost of over-withholding is more acute now for those investors, which may do well to consider planning to apply for a reduced withholding certificate prior to significant USRPI sales or dispositions. Buyer’s advisors and escrow agents should update their FIRPTA witholding forms and procedures with the new 15% rate.
- Now that the deduction for a qualified conservation easement is permanent, high net worth/high income individuals and trusts (both foreign and domestic) may plan with certainty the monetization of timberland assets through strategic conservation easement donations, yet still engage in typical harvesting and recreational activities on the properties.
- Corporations with long-term timberland holdings may utilize a temporary C-corporation tax of 23.8% on “qualified timber gains” for the 2016 tax year.
For further information on 2016 PATH Real Estate Tax Updates, please contact the following FisherBroyles attorneys: