Foreign investors in U.S. real estate face a number of hurdles when considering the structure of their investments. Direct ownership of U.S. real estate can subject the foreign investor to U.S. federal, state and local taxation on the income attributable to the real estate, and under current law may also result in U.S. federal income taxes on gains at exit under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). For this reason, many foreign investors choose to invest in U.S. real estate directly or indirectly through U.S. corporations (so-called blockers) that “block” the applicable U.S. tax filing and payment obligations, which are satisfied at the blocker level. Unfortunately, this subjects the investment to U.S. corporate income taxes and a sale of stock of the blocker would generally still result in tax payment and filing requirements on the part of the foreign investor under FIRPTA.
There are certain exceptions to the application of FIRPTA to a sale of stock, including for certain interests in publicly traded corporations and for certain types of foreign investors. An alternative vehicle that can rely on another exception to FIRPTA to address the foregoing concerns and significantly improve the tax efficiency of foreign investment in U.S. real estate is a real estate investment trust (REIT) with majority domestic ownership—a so-called domestically controlled REIT.
