IRS Proposes Changes To U.S. Real Estate Tax Rules

The United States Internal Revenue Service released proposed regulations that, when effective, will make it easier for certain foreign government entities, such as pension funds, that invest in U.S. real estate to maintain their ability to rely on the exemption provided by U.S. Code Section 892. The proposed regulations will, however, make it more difficult for U.S. REITs to qualify as "domestically controlled" for purposes of the FIRPTA rules under Section 897 of the Code.

In general, the regulations are not effective until final versions are published, but taxpayers are permitted to rely on them in the interim.

What you need to know

The proposed regulations make it easier for Section 892 controlled entities to avoid being treated as engaged in "commercial activities" by curtailing the impact of a noted trap for the unwary.