Foreign Investment in U.S. Real Estate: Portfolio Interest Exemption and IRC 163(j) Interest Limitations

Blocker Corporations, REITS, BEAT, FIRPTA Withholding Rules and Exemptions

A live 110-minute CPE webinar with interactive Q&A

Tuesday, December 17, 2019 (in 5 days)

1:00pm-2:50pm EST, 10:00am-11:50am PST

or call 1-800-926-7926
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This webinar will provide tax advisers with a practical guide to the opportunities and challenges for foreign investors in U.S. real estate. The panel will discuss the impact of the 2017 tax reform law on entity selection, FIRPTA withholding requirements, and blocker corporations. The webinar will also focus on the planning opportunities available to non-U.S. investors through the portfolio interest exemption to mitigate the new Section 163(j) interest limitations.

Description

The 2017 tax reform legislation indirectly provided significant benefits for foreign investors in U.S. real estate. Tax advisers to non-U.S. clients with U.S.-situs real property must be conversant with the specific tax advantages for this type of investment to avoid costly consequences.

Foreign individuals and corporations will continue to face tax liability and withholding requirements under the existing FIRPTA rules on their dispositions of U.S. real property interests. While the tax reform law did not materially change the FIRPTA structure, the Act lowered the FIRPTA withholding rate on capital gain dividends and liquidating distributions paid by REITs to align with the reduced top corporate tax rate of 21% provided in the new law.

A significant benefit available to foreign, but not U.S., investors in U.S. real estate is the portfolio interest exemption. The new business interest deduction limitation found in Section 163(j) enhances the value of this exemption to non-U.S. investors. The long-standing provision allows blocker corporations to bypass the 163(j) limitations in deducting interest expenses paid to a non-U.S. lender on a registered debt, as well as avoiding the 30% federal withholding tax on U.S.-sourced income.

Tax advisers must adhere to the election and documentation requirements to qualify for the portfolio interest exemption. The ability to avoid 163(j) limits will influence the choice of investment vehicle, as will new carried interest rules, new NOL limitations, limitations on interest expense, and depreciation changes in the tax reform law.

Listen as our panel of experienced tax professionals discusses the impact of the new tax law on foreign investors buying, holding, and disposing of U.S. real estate.

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Outline

  1. Overview of tax rules that apply to foreign investors in U.S. real estate
    1. Income
    2. FIRPTA and withholding requirements
    3. Estate and gift tax
    4. Income tax residency and estate/gift tax residency
    5. Treaty application
  2. New Section 163(j) business interest deduction limitation rules
  3. Portfolio interest exemption benefits
    1. Deductions not subject to 163(j) limitations
    2. Foreign lender not subject to tax on interest income paid by U.S. blocker corporation
    3. Exemption from 30% mandatory U.S. federal withholding
    4. Interaction with tax treaty provisions
  4. Documentation and structuring requirements to claim the portfolio interest exemption
    1. Registered obligation rules
    2. W-8BEN required from the lender
    3. Non-bank foreign (non-U.S.) lender
    4. Exceptions to portfolio interest exemption
  5. Typical structure of blocker corporation for foreign persons or corporations to hold U.S. real property assets
  6. Planning opportunities through entity selection or change

Benefits

The panel will review these and other key issues:

  • Tax implications of purchasing U.S. real estate individually or through a U.S. LLC vs. a foreign corporation, a U.S. corporation, or a trust
  • How the 163(j) business interest deduction limitation rules enhance the tax value of the portfolio interest exemption
  • Tax reporting obligations for non-U.S. owners of U.S. real estate
  • Special FIRPTA rules that apply to REITs

Faculty

Lehman, Richard
Richard S. Lehman
Attorney
United States Taxation

Mr. Lehman's tax law practice focuses on an array of commercial transactions involving an international and...  |  Read More

Melrose, Michael
Michael D. Melrose
Attorney
Baker & McKenzie

Mr. Melrose is a member of the Firm's tax and wealth management groups. He frequently advises high net worth US and...  |  Read More

O'Quinn, Paul
Paul O'Quinn
Attorney
Baker McKenzie

Mr. O'Quinn’s practice is focused on tax planning and tax controversy. He advises clients on various aspects...  |  Read More

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