On Friday, December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act”). The PATH Act includes a number of important changes relating to the tax treatment of foreign investment in U.S. real estate, particularly investments made through REITs. These changes are expected to make REITs an even more attractive vehicle for non-U.S. investors, especially foreign pension funds and certain “qualified shareholders,” to invest in U.S. real estate.

Background and Current Law -

Under section 897, introduced by the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), gain from the sale of a U.S. real property interest (“USRPI”) is taxed as effectively connected income, on a net basis at the graduated rates generally applicable to domestic taxpayers. USRPIs include direct interests in U.S. real estate as well as stock of current and former “U.S. real property holding corporations.” A U.S. real property holding corporation generally includes any domestic corporation if the value of the corporation’s USRPIs equals or exceeds the combined value of its interests in non-U.S. real property and its trade or business assets. Stock of a class that is publicly traded on an established securities market is only treated as a USRPI with respect to shareholders who actually or by attribution own more than 5% of the stock of that class. Under a special rule, stock of a former U.S. real property holding corporation ceases to be a USRPI if the corporation disposes of all of its USRPIs in taxable transactions (the “cleansing rule”).