A U.S. corporation is a USRPHC if the fair market value of its U.S. real property interests is at least 50% of the sum of its U.S. real property interests, its interests in real property outside the United States, and its other assets used in a trade or business. Cash and assets not used in a trade or business are outside the denominator. Stock in a USRPHC is a USRPI; sale by foreign persons triggers FIRPTA . Asset-test recharacterization (sale of real estate, recap into other assets) can change USRPHC status.
USRPHC mechanics and how sponsors plan for foreign-investor exits
FIRPTA, REIT, and treaty mechanics are highly fact-specific and change with new IRS guidance. This page is sponsor-POV process commentary, not tax or legal advice. Engage U.S. tax counsel and the foreign investor's home-country tax advisor before structuring any cross-border CRE transaction.
USRPHC test mechanics: §897(c)(2) defines a USRPHC as a U.S. corporation whose U.S. real property interests equal or exceed 50% of the sum of (a) U.S. real property interests, (b) interests in real property located outside the U.S., and (c) other assets used or held for use in a trade or business. The test uses fair market value. Cash and assets not used in a trade or business are outside the denominator.
Cleansing: if the corporation was a USRPHC at any time during the shorter of the holder's holding period and the five years ending on the sale, the stock can still be a U.S. real property interest. The cleansing rule in section 897(c)(1)(B) is separate: if on the sale date the corporation holds no U.S. real property interests, and every such interest it held during the testing period was disposed of in a fully taxable transaction, the stock is not a U.S. real property interest. Waiting out five clean years is not required when those conditions are met.
Look-through rules: in determining the asset percentages, the corporation looks through to its proportionate share of partnership and lower-tier subsidiary assets. A holding company that owns operating partnerships holding U.S. real property is generally a USRPHC if the look-through aggregation crosses 50%.
Planning use: REITs that meet the domestically-controlled exception are exempt from USRPHC treatment for FIRPTA purposes (because §897(h) specifically excludes them). Other corporate structures, non-REIT C-corps holding U.S. real estate, typically remain USRPHCs for the duration of the holding period.
Practical sponsor implication: when a foreign investor takes equity in a corporate structure (non-REIT) holding U.S. real estate, the foreign investor's exit will face FIRPTA on the stock sale if the corporation remains a USRPHC. Plan exit timing and structure (sale vs. distribution vs. recap) with tax counsel familiar with the USRPHC mechanics.
Sources
- Foreign Investment in Real Property Tax Act (FIRPTA) Withholding · U.S. Internal Revenue Service · current
- Real Estate Investment Trusts (REITs): Tax Information · U.S. Internal Revenue Service · current