Chapter 51 - § 51.8 • FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT OF 1980 (FIRPTA)

• Jurisdiction: Colorado

§ 51.8 • FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT OF 1980 (FIRPTA)

The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) provisions are embodied in I.R.C. § 897, which establishes an overriding principle that the disposition of a "United States real property interest" (USRPI) automatically generates effectively connected U.S. trade or business income for all Code purposes. I.R.C. § 897(a)(1). Even otherwise tax-free exchanges are subject to taxation unless the property is exchanged for another USRPI that, if disposed of immediately following the exchange, would be subject to U.S. taxation. I.R.C. § 897(e)(1). Certain regulatory requirements must also be satisfied in order to ensure tax-free exchange treatment. I.R.C. § 897(e)(2); Temp. Treas. Reg. § 1.897-6T(a)(1). Return filing requirements have been suspended with respect to non-recognition transfers if the transfer qualifies in its entirety for non-recognition treatment and if the transferor satisfies certain specified conditions. See Notice 89-57, 1989-1 C.B. 698.

§ 51.8.1—U.S. Real Property Interest (USRPI) — Definition

The term "real property" includes movable walls, furnishings, and other personal property associated with the use thereof. I.R.C. § 897(c)(6)(B). Extensive regulations establish guidelines to determine the extent to which personal property is "associated with the use" of real property, and means of "disassociation" that can result in tax savings with respect to the gain realized on the disposition of the personal property. Treas. Reg. § 1.897-1(b)(4).

The "interest" disposed of includes the ownership and co-ownership of land or improvements thereto, leasehold interests, and options. I.R.C. § 897(c)(6). The regulations expand such interests to include timesharing interests, life estates, remainder/reversionary interests, and financing transactions in the nature of shared appreciation mortgages. Treas. Reg. § 1.897-1(d)(2).

§ 51.8.2—Form of Ownership Interest

Both direct and indirect ownership interests are regarded as USRPIs. Thus, a USRPI includes an interest in a foreign or domestic partnership, a trust or estate that holds a USRPI, and the ownership of stock in a domestic corporation that is a U.S. real property holding corporation (USRPHC). I.R.C. § 897(c)(1); Notice 88-72, 1988-2 C.B. 383. In simplified terms, a USRPHC consists of a U.S. corporation in which the value of its USRPIs is equal to or greater than 50 percent of the value of all assets. I.R.C. § 897(c)(2)...