Law firm memo outlining PATH Act tax provisions on FIRPTA withholding and REIT spin‑offs

The PATH Act includes certain revenue raising provisions to offset, in part, the tax revenue loss anticipated to result of the above-described tax reform provisions of the Act. Such revenue raisers include (among other technical changes) the following provisions: A. Increase in FIRPTA Withholding Rate. The purchaser of a U.S. real property interest from a non- U.S. person was previously required to withhold 10 percent of the purchase price under FIRPTA. The PATH Act increases this rate to 15 percent for dispositions occurring after the 60th day following enactment, but maintains the 10 percent rate for sales of residential property for between $300,000 and $1,000,000. This provision is not a tax increase but is designed to ensure that FIRPTA withholding collects a sufficient portion of the taxes owed. B. Restriction on REIT Spin-offs. In recent years, it has become increasingly common for large corporate taxpayers to reduce their tax bills by contributing real estate used in their businesses to a subsidiary, spinning off the subsidiary in a tax free transaction under Code section 355, and then having the spun-out corporation making a REIT election. The PATH Act curtails such activity by (i) providing that neither the distributing corporation nor the spun-out corporation can make a REIT election for ten years after that corporation was involved in a Section 355 transaction and (ii) denying tax-free treatment to spin-offs in which the distributing corporation or soun-out corporation (but not both) is a REIT. 5. CONCLUSION The revisions to the FIRPTA and REIT rules discussed above represent a potentially large expansion of the incentives for foreign investment in U.S. real property interests, especially for foreign pension funds. Sponsors of U.S. real property investment funds and foreign investors with interests in U.S. real estate assets should review the new provisions to determine whether such persons could benefit from such U.S. tax law changes. Sadis & Goldberg LLP Please feel free to discuss any aspect of this A/ert with your regular Sadis & Goldberg contact or with any of the partners, whose names and contact information are provided below. Alex Gelinas, 212.573.8159, [email protected] Daniel G. Viola, 212.573.8038, [email protected] Danielle Epstein-Day, 212.573.8416, [email protected] Douglas Hirsch, 212.573.6670, [email protected] Erika Winkler, 212.573.8022, [email protected] Jamie Kim, 212.573.8034, [email protected] Jeffrey Goldberg, 212.573.6666, [email protected] Jennifer Rossan, 212.573.8783, [email protected] John Araneo, 212.573.8158, [email protected] Lance Friedler, 212.573.8030, [email protected] Mitchell Taras, 212.5738417, [email protected] Paul Fasciano, 212.573.8025, [email protected] Ron S. Geffner, 212.573.6660, [email protected] Sam Lieberman, 212.573.8164, [email protected] Steven Etkind, 212.573.8412, [email protected] Steven Huttler, 212.573.8424, [email protected] Yehuda Braunstein, 212.573.8029, [email protected] Yelena Maltser, 212.573.8429, [email protected] HOUSE_OVERSIGHT_026832