26 U.S.C. § 897: Disposition of investment in United States real property

(a) General rule

Cases: Botai Corp. v. Commissioner, T.C. Memo. 1990-475

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(1) Treatment as effectively connected with United States trade or business For purposes of this title, gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest shall be taken into account—

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(A) in the case of a nonresident alien individual, under section 871(b)(1), or

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 401(a)(155), substituted “section 871(b)(1)” for “section 871(B)(1)”.

(B) in the case of a foreign corporation, under section 882(a)(1),

as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such trade or business.

(2) Minimum tax on nonresident alien individuals

Amended 1986, 1993

1993 Pub. L. 103-66 Pub. L. 103–66 substituted “Minimum” for “21-percent minimum” in heading and “the taxable excess for purposes of section 55(b)(1)(A) shall not be less than” for “the amount determined under section 55(b)(1)(A) shall not be less than 21 percent of” in subpar. (A).
1986 Pub. L. 99-514 Pub. L. 99–514, § 701(e)(4)(G), substituted “21-percent” for “20-percent” in heading and amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: “In the case of any nonresident alien individual, the amount determined under section 55(a)(1) for the taxable year shall not be less than 20 percent of the lesser of—
“(i) the individual’s alternative minimum taxable income (as defined in section 55(b)) for the taxable year, or
“(ii) the individual’s net United States real property gain for the taxable year.”

(A) In general In the case of any nonresident alien individual, the taxable excess for purposes of section 55(b)(1) shall not be less than the lesser of—

Amended 1982, 2017

2017 Pub. L. 115-97 Pub. L. 115–97 substituted “section 55(b)(1)” for “section 55(b)(1)(A)” in introductory provisions.
1982 Pub. L. 97-248 Pub. L. 97–248 substituted “section 55(a)(1) for the taxable year shall not be less than 20 percent of the lesser of—” for “section 55(a)(1)(A) for the taxable year shall not be less than 20 percent of whichever of the following is the least:” in introductory provisions, in cl. (i) struck out “(1)” after “section 55(b)” and inserted “or” at the end, in cl. (ii) substituted a period for a comma and struck out “or” at the end, and struck out former cl. (iii), which had provided for the amount of $60,000 as a third alternative.

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(i) the individual’s alternative minimum taxable income (as defined in section 55(b)(1)(D)) for the taxable year, or

Amended 2022

2022 Pub. L. 117-169 Pub. L. 117–169 substituted “55(b)(1)(D)” for “55(b)(2)”.

(ii) the individual’s net United States real property gain for the taxable year.

(B) Net United States real property gain For purposes of subparagraph (A), the term “net United States real property gain” means the excess of—

(i) the aggregate of the gains for the taxable year from dispositions of United States real property interests, over

(ii) the aggregate of the losses for the taxable year from dispositions of such interests.

(b) Limitation on losses of individuals In the case of an individual, a loss shall be taken into account under subsection (a) only to the extent such loss would be taken into account under section 165(c) (determined without regard to subsection (a) of this section).

(c) United States real property interest For purposes of this section—

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(1) United States real property interest

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(A) In general Except as provided in subparagraph (B) or subsection (k), the term “United States real property interest” means—

Amended 2015

2015 Pub. L. 114-113 Pub. L. 114–113, § 322(a)(2)(A), inserted “or subsection (k)” after “subparagraph (B)” in introductory provisions.

(i) an interest in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the Virgin Islands, and

Amended 1981

1981 Pub. L. 97-34 Pub. L. 97–34, § 831(a)(1), defined “United States real property interest” to also mean an interest in real property located in the Virgin Islands.

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(ii) any interest (other than an interest solely as a creditor) in any domestic corporation unless the taxpayer establishes (at such time and in such manner as the Secretary by regulations prescribes) that such corporation was at no time a United States real property holding corporation during the shorter of—

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(I) the period after June 18, 1980, during which the taxpayer held such interest, or

(II) the 5-year period ending on the date of the disposition of such interest.

(B) Exclusion for interest in certain corporations The term “United States real property interest” does not include any interest in a corporation if—

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(i) as of the date of the disposition of such interest, such corporation did not hold any United States real property interests,

(ii) all of the United States real property interests held by such corporation at any time during the shorter of the periods described in subparagraph (A)(ii)—

(I) were disposed of in transactions in which the full amount of the gain (if any) was recognized, or

(II) ceased to be United States real property interests by reason of the application of this subparagraph to 1 or more other corporations, and

(iii) neither such corporation nor any predecessor of such corporation was a regulated investment company or a real estate investment trust at any time during the shorter of the periods described in subparagraph (A)(ii).

Amended 2015

2015 Pub. L. 114-113 Pub. L. 114–113, § 325(a), added cl. (iii).

(2) United States real property holding corporation The term “United States real property holding corporation” means any corporation if—

Cases: Dynamo Holdings Ltd. Partnership v. Commissioner, T.C. Memo. 2018-61

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(A) the fair market value of its United States real property interests equals or exceeds 50 percent of

(B) the fair market value of—

(i) its United States real property interests,

(ii) its interests in real property located outside the United States, plus

(iii) any other of its assets which are used or held for use in a trade or business.

(3) Exception for stock regularly traded on established securities markets If any class of stock of a corporation is regularly traded on an established securities market, stock of such class shall be treated as a United States real property interest only in the case of a person who, at some time during the shorter of the periods described in paragraph (1)(A)(ii), held more than 5 percent of such class of stock.

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(4) Interests held by foreign corporations and by partnerships, trusts, and estates For purposes of determining whether any corporation is a United States real property holding corporation—

(A) Foreign corporations Paragraph (1)(A)(ii) shall be applied by substituting “any corporation (whether foreign or domestic)” for “any domestic corporation”.

(B) Assets held by partnerships, etc. Under regulations prescribed by the Secretary, assets held by a partnership, trust, or estate shall be treated as held proportionately by its partners or beneficiaries. Any asset treated as held by a partner or beneficiary by reason of this subparagraph which is used or held for use by the partnership, trust, or estate in a trade or business shall be treated as so used or held by the partner or beneficiary. Any asset treated as held by a partner or beneficiary by reason of this subparagraph shall be so treated for purposes of applying this subparagraph successively to partnerships, trusts, or estates which are above the first partnership, trust, or estate in a chain thereof.

Amended 1981

1981 Pub. L. 97-34 Pub. L. 97–34, § 831(b), substituted “Assets” for “Interests” in heading and in first sentence “Under regulations prescribed by the Secretary, assets held by a partnership, trust or estate shall be treated as held” for “United States real property interests held by a partnership, trust, or estate shall be treated as owned” before “proportionately by its partners or beneficiaries”, and inserted provisions respecting treatment of an asset as used or held for use in a trade or business by a partner or beneficiary when used or held by the partnership, trust, or estate in a trade or business and attributing chain treatment of such trade or business to partnership, trust, or estate which are above the first such entity.

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(5) Treatment of controlling interests

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(A) In general Under regulations, for purposes of determining whether any corporation is a United States real property holding corporation, if any corporation (hereinafter in this paragraph referred to as the “first corporation”) holds a controlling interest in a second corporation—

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(i) the stock which the first corporation holds in the second corporation shall not be taken into account,

(ii) the first corporation shall be treated as holding a portion of each asset of the second corporation equal to the percentage of the fair market value of the stock of the second corporation represented by the stock held by the first corporation, and

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(iii) any asset treated as held by the first corporation by reason of clause (ii) which is used or held for use by the second corporation in a trade or business shall be treated as so used or held by the first corporation.

Any asset treated as held by the first corporation by reason of the preceding sentence shall be so treated for purposes of applying the preceding sentence successively to corporations which are above the first corporation in a chain of corporations.

(B) Controlling interest For purposes of subparagraph (A), the term “controlling interest” means 50 percent or more of the fair market value of all classes of stock of a corporation.

(6) Other special rules

(A) Interest in real property The term “interest in real property” includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon.

(B) Real property includes associated personal property The term “real property” includes movable walls, furnishings, and other personal property associated with the use of the real property.

(C) Constructive ownership rules For purposes of determining under paragraph (3) whether any person holds more than 5 percent of any class of stock and of determining under paragraph (5) whether a person holds a controlling interest in any corporation, section 318(a) shall apply (except that paragraphs (2)(C) and (3)(C) of section 318(a) shall be applied by substituting “5 percent” for “50 percent”).

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(d) Treatment of distributions by foreign corporations

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 631(e)(12), in heading, struck out “, etc.,” after “distributions”, and in text, struck out heading and designation for par. (1), redesignated subpar. (A) as par. (1), redesignated subpar. (B) as par. (2) and substituted “paragraph (1)” for “subparagraph (A)” in introductory provisions, redesignated cl. (i) and its subcls. (I) and (II) as subpar. (A) and cls. (i) and (ii), respectively, redesignated cl. (ii) as subpar. (B), and struck out former par. (2) which provided that section 337 not apply to any sale or exchange of a United States real property interest by a foreign corporation.

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(1) In general Except to the extent otherwise provided in regulations, notwithstanding any other provision of this chapter, gain shall be recognized by a foreign corporation on the distribution (including a distribution in liquidation or redemption) of a United States real property interest in an amount equal to the excess of the fair market value of such interest (as of the time of the distribution) over its adjusted basis.

Amended 1981

1981 Pub. L. 97-34 Pub. L. 97–34, § 831(c), substituted “Exceptions” for “Exception where there is a carryover basis” in heading, inserted introductory text “Gain shall not be recognized under subparagraph (A)”, inserted cls. (i)(I) and (ii), and substituted cl. (i)(II) the basis of the distributed property in the hands of the distributee is no greater than the adjusted basis of such property before the distribution, increased by the amount of gain (if any) recognized by the distributing corporation” for subpar. (B) provision “Subparagraph (A) shall not apply if the basis of the distributed property in the hands of the distributee is the same as the adjusted basis of such property before the distribution increased by the amount of any gain recognized by the distributing corporation.”

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(2) Exceptions Gain shall not be recognized under paragraph (1)—

Textual readingANY OF= gain not recognized under paragraph (1)

(A) if—

Textual readingALL OF= gain not recognized on distribution

(i) at the time of the receipt of the distributed property, the distributee would be subject to taxation under this chapter on a subsequent disposition of the distributed property, and

(ii) the basis of the distributed property in the hands of the distributee is no greater than the adjusted basis of such property before the distribution, increased by the amount of gain (if any) recognized by the distributing corporation, or

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(B) if such nonrecognition is provided in regulations prescribed by the Secretary under subsection (e)(2).

“In regulations prescribed by the Secretary” leaves this to Treasury. No regulation cites this provision (eCFR, Oct 19, 2026)

(e) Coordination with nonrecognition provisions

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(1) In general Except to the extent otherwise provided in subsection (d) and paragraph (2) of this subsection, any nonrecognition provision shall apply for purposes of this section to a transaction only in the case of an exchange of a United States real property interest for an interest the sale of which would be subject to taxation under this chapter.

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(2) Regulations The Secretary shall prescribe regulations (which are necessary or appropriate to prevent the avoidance of Federal income taxes) providing—

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(A) the extent to which nonrecognition provisions shall, and shall not, apply for purposes of this section, and

(B) the extent to which—

(i) transfers of property in reorganization, and

(ii) changes in interests in, or distributions from, a partnership, trust, or estate,

shall be treated as sales of property at fair market value.

(3) Nonrecognition provision defined For purposes of this subsection, the term “nonrecognition provision” means any provision of this title for not recognizing gain or loss.

[(f) Repealed. Pub. L. 104–188, title I, § 1702(g)(2), Aug. 20, 1996, 110 Stat. 1873]

Amended 1996

1996 Pub. L. 104-188 Pub. L. 104–188 struck out subsec. (f) which read as follows:
1996 “(f) Distributions by Domestic Corporations to Foreign Shareholders.—If a domestic corporation distributes a United States real property interest to a nonresident alien individual or a foreign corporation in a distribution to which section 301 applies, notwithstanding any other provision of this chapter, the basis of such United States real property interest in the hands of such nonresident alien individual or foreign corporation shall not exceed—
“(1) the adjusted basis of such property before the distribution, increased by
“(2) the sum of—
“(A) any gain recognized by the distributing corporation on the distribution, and
“(B) any tax paid under this chapter by the distributee on such distribution.”

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(g) Special rule for sales of interest in partnerships, trusts, and estates Under regulations prescribed by the Secretary, the amount of any money, and the fair market value of any property, received by a nonresident alien individual or foreign corporation in exchange for all or part of its interest in a partnership, trust, or estate shall, to the extent attributable to United States real property interests, be considered as an amount received from the sale or exchange in the United States of such property.

Cases: Grecian Magnesite Mining, Indus. & Shipping Co. v. Commissioner, 149 T.C. No. 3 (2017)

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(h) Special rules for certain investment entities For purposes of this section—

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 411(c)(5), substituted “certain investment entities” for “REITS” in heading.

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(1) Look-through of distributions Any distribution by a qualified investment entity to a nonresident alien individual, a foreign corporation, or other qualified investment entity shall, to the extent attributable to gain from sales or exchanges by the qualified investment entity of United States real property interests, be treated as gain recognized by such nonresident alien individual, foreign corporation, or other qualified investment entity from the sale or exchange of a United States real property interest. Notwithstanding the preceding sentence, any distribution by a qualified investment entity to a nonresident alien individual or a foreign corporation with respect to any class of stock which is regularly traded on an established securities market located in the United States shall not be treated as gain recognized from the sale or exchange of a United States real property interest if such individual or corporation did not own more than 5 percent of such class of stock at any time during the 1-year period ending on the date of such distribution.

Amended 2004, 2005, 2006

2006 Pub. L. 109-222 Pub. L. 109–222, § 505(a)(1), in first sentence, substituted “a nonresident alien individual, a foreign corporation, or other qualified investment entity” for “a nonresident alien individual or a foreign corporation” and “such nonresident alien individual, foreign corporation, or other qualified investment entity” for “such nonresident alien individual or foreign corporation” and inserted second sentence and struck out former second sentence which read as follows: “Notwithstanding the preceding sentence, any distribution by a real estate investment trust with respect to any class of stock which is regularly traded on an established securities market located in the United States shall not be treated as gain recognized from the sale or exchange of a United States real property interest if the shareholder did not own more than 5 percent of such class of stock at any time during the 1-year period ending on the date of the distribution.”
2005 Pub. L. 109-135 Pub. L. 109–135 substituted “any distribution by a real estate investment trust with respect to any class of stock” for “any distribution by a REIT with respect to any class of stock” and “the 1-year period ending on the date of the distribution” for “the taxable year”.
2004 Pub. L. 108-357 Pub. L. 108–357, § 418(a), inserted at end “Notwithstanding the preceding sentence, any distribution by a REIT with respect to any class of stock which is regularly traded on an established securities market located in the United States shall not be treated as gain recognized from the sale or exchange of a United States real property interest if the shareholder did not own more than 5 percent of such class of stock at any time during the taxable year.”
2004 Pub. L. 108-357 Pub. L. 108–357, § 411(c)(1), substituted “qualified investment entity” for “REIT” in two places.

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(2) Sale of stock in domestically controlled entity not taxed The term “United States real property interest” does not include any interest in a domestically controlled qualified investment entity.

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 411(c)(2), amended heading and text of par. (2) generally. Prior to amendment, text read as follows: “The term ‘United States real property interest’ does not include any interest in a domestically-controlled REIT.”

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(3) Distributions by domestically controlled qualified investment entities In the case of a domestically controlled qualified investment entity, rules similar to the rules of subsection (d) shall apply to the foreign ownership percentage of any gain.

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 411(c)(2), amended heading and text of par. (3) generally. Prior to amendment, text read as follows: “In the case of a domestically-controlled REIT, rules similar to the rules of subsection (d) shall apply to the foreign ownership percentage of any gain.”

(4) Definitions and special rules

Amended 2015

2015 Pub. L. 114-113 Pub. L. 114–113, § 322(b)(1)(B), inserted “and special rules” after “Definitions” in heading.

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(A) Qualified investment entity The term “qualified investment entity” means—

Amended 2004, 2015

2015 Pub. L. 114-113 Pub. L. 114–113, § 133(a), struck out cl. (i) designation and heading before “The term ‘qualified investment entity’ means—”, redesignated subcls. (I) and (II) of former cl. (i) as cls. (i) and (ii), respectively, and struck out former cl. (ii). Prior to amendment, text of cl. (ii) read as follows: “Clause (i)(II) shall not apply after December 31, 2014. Notwithstanding the preceding sentence, an entity described in clause (i)(II) shall be treated as a qualified investment entity for purposes of applying paragraphs (1) and (5) and section 1445 with respect to any distribution by the entity to a nonresident alien individual or a foreign corporation which is attributable directly or indirectly to a distribution to the entity from a real estate investment trust.”
2004 Pub. L. 108-357 Pub. L. 108–357, § 411(c)(3), amended heading and text of subpar. (A) generally. Prior to amendment, text read as follows: “The term ‘REIT’ means a real estate investment trust.”

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(i) any real estate investment trust, and

Amended 2006

2006 Pub. L. 109-222 Pub. L. 109–222, § 504(a), inserted “which is a United States real property holding corporation or which would be a United States real property holding corporation if the exceptions provided in subsections (c)(3) and (h)(2) did not apply to interests in any real estate investment trust or regulated investment company” after “any regulated investment company”.

(ii) any regulated investment company which is a United States real property holding corporation or which would be a United States real property holding corporation if the exceptions provided in subsections (c)(3) and (h)(2) did not apply to interests in any real estate investment trust or regulated investment company.

Textual readingALL OF= a qualified investment entity

“any regulated investment company”

“which is a United States real property holding corporation or which would be a United States real property holding corporation if the exceptions provided in subsections (c)(3) and (h)(2) did not apply to interests in any real estate investment trust or regulated investment company”

Amended 2006, 2008, 2010, 2013, 2014, 2015, 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(p)(6), repealed Pub. L. 114–113, § 322(b)(2), and provided that cl. (ii) shall be applied as if amendment had never been enacted. See 2015 Amendment note below.
2015 Pub. L. 114-113 Pub. L. 114–113, § 322(b)(2), which directed insertion of “and for purposes of determining whether a real estate investment trust is a domestically controlled qualified investment entity under this subsection” after “real estate investment trust”, was repealed by Pub. L. 115–141, § 101(p)(6), with cl. (ii) to be applied as if amendment had never been enacted.
2014 Pub. L. 113-295 Pub. L. 113–295 substituted “December 31, 2014” for “December 31, 2013”.
2013 Pub. L. 112-240 Pub. L. 112–240 substituted “December 31, 2013” for “December 31, 2011”.
2010 Pub. L. 111-312 Pub. L. 111–312 substituted “December 31, 2011” for “December 31, 2009”.
2008 Pub. L. 110-343 Pub. L. 110–343 substituted “December 31, 2009” for “December 31, 2007”.
2006 Pub. L. 109-222 Pub. L. 109–222, § 505(a)(2), inserted at end “Notwithstanding the preceding sentence, an entity described in clause (i)(II) shall be treated as a qualified investment entity for purposes of applying paragraphs (1) and (5) and section 1445 with respect to any distribution by the entity to a nonresident alien individual or a foreign corporation which is attributable directly or indirectly to a distribution to the entity from a real estate investment trust.”

(B) Domestically controlled The term “domestically controlled qualified investment entity” means any qualified investment entity in which at all times during the testing period less than 50 percent in value of the stock was held directly or indirectly by foreign persons.

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 411(c)(3), amended heading and text of subpar. (B) generally. Prior to amendment, text read as follows: “The term ‘domestically-controlled REIT’ means a REIT in which at all times during the testing period less than 50 percent in value of the stock was held directly or indirectly by foreign persons.”

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(C) Foreign ownership percentage The term “foreign ownership percentage” means that percentage of the stock of the qualified investment entity which was held (directly or indirectly) by foreign persons at the time during the testing period during which the direct and indirect ownership of stock by foreign persons was greatest.

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 411(c)(4), substituted “qualified investment entity” for “REIT”.

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(D) Testing period The term “testing period” means whichever of the following periods is the shortest:

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(i) the period beginning on June 19, 1980, and ending on the date of the disposition or of the distribution, as the case may be,

(ii) the 5-year period ending on the date of the disposition or of the distribution, as the case may be, or

(iii) the period during which the qualified investment entity was in existence.

Amended 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 411(c)(4), substituted “qualified investment entity” for “REIT”.

(E) Special ownership rules For purposes of determining the holder of stock under subparagraphs (B) and (C)—

Amended 2015

2015 Pub. L. 114-113 Pub. L. 114–113, § 322(b)(1)(A), added subpar. (E).

(i) in the case of any class of stock of the qualified investment entity which is regularly traded on an established securities market in the United States, a person holding less than 5 percent of such class of stock at all times during the testing period shall be treated as a United States person unless the qualified investment entity has actual knowledge that such person is not a United States person,

NOT“unless the qualified investment entity has actual knowledge that such person is not a United States person,” Opening words

Textual readingALL OF= treated as a united states person

“any class of stock of the qualified investment entity which is regularly traded on an established securities market in the United States”

“a person holding less than 5 percent of such class of stock at all times during the testing period”

NOT“the qualified investment entity has actual knowledge that such person is not a United States person”

(ii) any stock in the qualified investment entity held by another qualified investment entity—

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(I) any class of stock of which is regularly traded on an established securities market, or

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(II) which is a regulated investment company which issues redeemable securities (within the meaning of section 2 of the Investment Company Act of 1940),

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shall be treated as held by a foreign person, except that if such other qualified investment entity is domestically controlled (determined after application of this subparagraph), such stock shall be treated as held by a United States person, and

(iii) any stock in the qualified investment entity held by any other qualified investment entity not described in subclause (I) or (II) of clause (ii) shall only be treated as held by a United States person in proportion to the stock of such other qualified investment entity which is (or is treated under clause (ii) or (iii) as) held by a United States person.

(5) Treatment of certain wash sale transactions

Amended 2006

2006 Pub. L. 109-222 Pub. L. 109–222, § 506(a), added par. (5).

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(A) In general If an interest in a domestically controlled qualified investment entity is disposed of in an applicable wash sale transaction, the taxpayer shall, for purposes of this section, be treated as having gain from the sale or exchange of a United States real property interest in an amount equal to the portion of the distribution described in subparagraph (B) with respect to such interest which, but for the disposition, would have been treated by the taxpayer as gain from the sale or exchange of a United States real property interest under paragraph (1).

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(B) Applicable wash sales transaction For purposes of this paragraph—

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(i) In general The term “applicable wash sales transaction” means any transaction (or series of transactions) under which a nonresident alien individual, foreign corporation, or qualified investment entity—

“any transaction (or series of transactions) under which a nonresident alien individual, foreign corporation, or qualified investment entity—” Opening words

Textual readingALL OF= an applicable wash sales transaction

(I) disposes of an interest in a domestically controlled qualified investment entity during the 30-day period preceding the ex-dividend date of a distribution which is to be made with respect to the interest and any portion of which, but for the disposition, would have been treated by the taxpayer as gain from the sale or exchange of a United States real property interest under paragraph (1), and

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(II) acquires, or enters into a contract or option to acquire, a substantially identical interest in such entity during the 61-day period beginning with the 1st day of the 30-day period described in subclause (I).

“Substantially” implies facts and circumstances. No regulation cites this provision (eCFR, Oct 19, 2026)

For purposes of subclause (II), a nonresident alien individual, foreign corporation, or qualified investment entity shall be treated as having acquired any interest acquired by a person related (within the meaning of section 267(b) or 707(b)(1)) to the individual, corporation, or entity, and any interest which such person has entered into any contract or option to acquire.

(ii) Application to substitute dividend and similar payments Subparagraph (A) shall apply to—

(I) any substitute dividend payment (within the meaning of section 861), or

(II) any other similar payment specified in regulations which the Secretary determines necessary to prevent avoidance of the purposes of this paragraph.

The portion of any such payment treated by the taxpayer as gain from the sale or exchange of a United States real property interest under subparagraph (A) by reason of this clause shall be equal to the portion of the distribution such payment is in lieu of which would have been so treated but for the transaction giving rise to such payment.

(iii) Exception where distribution actually received A transaction shall not be treated as an applicable wash sales transaction if the nonresident alien individual, foreign corporation, or qualified investment entity receives the distribution described in clause (i)(I) with respect to either the interest which was disposed of, or acquired, in the transaction.

(iv) Exception for certain publicly traded stock A transaction shall not be treated as an applicable wash sales transaction if it involves the disposition of any class of stock in a qualified investment entity which is regularly traded on an established securities market within the United States but only if the nonresident alien individual, foreign corporation, or qualified investment entity did not own more than 5 percent of such class of stock at any time during the 1-year period ending on the date of the distribution described in clause (i)(I).

(i) Election by foreign corporation to be treated as domestic corporation

Amended 1981

1981 Pub. L. 97-34 Pub. L. 97–34, § 831(d), in par. (1)(A) substituted “holds a United States real property interest” for “has a permanent establishment in the United States”, in par. (1)(B) substituted “treaty obligation of the United States the foreign corporation is entitled to nondiscriminatory treatment with respect to that interest” for “treaty, such permanent establishment may not be treated less favorably than domestic corporations carrying on the same activities”, in par. (3) inserted subpar. (A), designated existing provisions as subpar. (B), in subpar. (B) substituted “such other conditions as the Secretary may prescribe by regulations with respect to the corporation or its shareholders” for “such conditions as may be prescribed by the Secretary”, and prescribed percentage interest required for making the requisite election and application of constructive ownership rules in determining existence of the required percentage of a class of interest.

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(1) In general If—

Textual readingALL OF= foreign corporation may elect domestic treatment

(A) a foreign corporation holds a United States real property interest, and

(B) under any treaty obligation of the United States the foreign corporation is entitled to nondiscriminatory treatment with respect to that interest,

then such foreign corporation may make an election to be treated as a domestic corporation for purposes of this section, section 1445, and section 6039C.

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(f)(1), inserted reference to section 1445.

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(2) Revocation only with consent Any election under paragraph (1), once made, may be revoked only with the consent of the Secretary.

(3) Making of election An election under paragraph (1) may be made only—

(A) if all of the owners of all classes of interests (other than interests solely as a creditor) in the foreign corporation at the time of the election consent to the making of the election and agree that gain, if any, from the disposition of such interest after June 18, 1980, which would be taken into account under subsection (a) shall be taxable notwithstanding any provision to the contrary in a treaty to which the United States is a party, and

Textual readingALL OF= subparagraph (a) election requirement met

“all of the owners of all classes of interests (other than interests solely as a creditor) in the foreign corporation at the time of the election consent to the making of the election”

“agree that gain, if any, from the disposition of such interest after June 18, 1980, which would be taken into account under subsection (a) shall be taxable notwithstanding any provision to the contrary in a treaty to which the United States is a party”

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(B) subject to such other conditions as the Secretary may prescribe by regulations with respect to the corporation or its shareholders.

In the case of a class of interest (other than an interest solely as a creditor) which is regularly traded on an established securities market, the consent described in subparagraph (A) need only be made by any person if such person held more than 5 percent of such class of interest at some time during the shorter of the periods described in subsection (c)(1)(A)(ii). The constructive ownership rules of subsection (c)(6)(C) shall apply in determining whether a person held more than 5 percent of a class of interest.

(4) Exclusive method of claiming nondiscrimination The election provided by paragraph (1) shall be the exclusive remedy for any person claiming discriminatory treatment with respect to this section, section 1445, and section 6039C.

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 1810(f)(1), inserted reference to section 1445.

(j) Certain contributions to capital Except to the extent otherwise provided in regulations, gain shall be recognized by a nonresident alien individual or foreign corporation on the transfer of a United States real property interest to a foreign corporation if the transfer is made as paid in surplus or as a contribution to capital, in the amount of the excess of—

Amended 1981

1981 Pub. L. 97-34 Pub. L. 97–34, § 831(f), (g), added subsecs. (j) to (l).

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(1) the fair market value of such property transferred, over

(2) the sum of—

(A) the adjusted basis of such property in the hands of the transferor, plus

(B) the amount of gain, if any, recognized to the transferor under any other provision at the time of the transfer.

(k) Special rules relating to real estate investment trusts

Amended 1981, 1990, 2015

2015 Pub. L. 114-113 Pub. L. 114–113, § 322(a)(1), added subsec. (k).
1990 Pub. L. 101-508 Pub. L. 101–508 struck out subsec. (k) which read as follows: “If—
“(1) a foreign corporation adopts, or has adopted, a plan of liquidation described in section 334(b)(2)(A), and
“(2) the 12-month period described in section 334(b)(2)(B) for the acquisition by purchase of the stock of the foreign corporation, began after December 31, 1979, and before November 26, 1980,
then such foreign corporation may make an election to be treated, for the period following June 18, 1980, as a domestic corporation pursuant to section 897(i)(1). Notwithstanding an election under the preceding sentence, any selling shareholder of such corporation shall be considered to have sold the stock of a foreign corporation.”
1981 Pub. L. 97-34 Pub. L. 97–34, § 831(f), (g), added subsecs. (j) to (l).

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(1) Increase in percentage ownership for exceptions for persons holding publicly traded stock

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(A) Dispositions In the case of any disposition of stock in a real estate investment trust, paragraphs (3) and (6)(C) of subsection (c) shall each be applied by substituting “more than 10 percent” for “more than 5 percent”.

(B) Distributions In the case of any distribution from a real estate investment trust, subsection (h)(1) shall be applied by substituting “10 percent” for “5 percent”.

(2) Stock held by qualified shareholders not treated as United States real property interest

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 401(a)(156), substituted “United States real property interest” for “USRPI” in heading.

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(A) In general Except as provided in subparagraph (B)—

(i) stock of a real estate investment trust which is held directly (or indirectly through 1 or more partnerships) by a qualified shareholder shall not be treated as a United States real property interest, and

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(ii) notwithstanding subsection (h)(1), any distribution to a qualified shareholder shall not be treated as gain recognized from the sale or exchange of a United States real property interest to the extent the stock of the real estate investment trust held by such qualified shareholder is not treated as a United States real property interest under clause (i).

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(B) Exception In the case of a qualified shareholder with one or more applicable investors—

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(p)(1)(A), substituted “one” for “1” in introductory provisions.

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(i) subparagraph (A)(i) shall not apply to the applicable percentage of the stock of the real estate investment trust held by the qualified shareholder, and

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(p)(1)(A), added cl. (i) and struck out former cl. (i) which read as follows: “subparagraph (A)(i) shall not apply to so much of the stock of a real estate investment trust held by a qualified shareholder as bears the same ratio to the value of the interests (other than interests held solely as a creditor) held by such applicable investors in the qualified shareholder bears to value of all interests (other than interests held solely as a creditor) in the qualified shareholder, and”.

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(ii) the applicable percentage of the amounts realized by the qualified shareholder with respect to any disposition of stock in the real estate investment trust or with respect to any distribution from the real estate investment trust attributable to gain from sales or exchanges of a United States real property interest shall be treated as amounts realized from the disposition of United States real property interests.

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(p)(1)(A), substituted “the applicable percentage of the” for “a percentage equal to the ratio determined under clause (i) of the”.

(C) Special rule for certain distributions treated as sale or exchange If a distribution by a real estate investment trust is treated as a sale or exchange of stock under section 301(c)(3), 302, or 331 with respect to a qualified shareholder—

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(i) in the case of an applicable investor, subparagraph (B) shall apply with respect to such distribution, and

(ii) in the case of any other person, such distribution shall be treated under section 857(b)(3)(F) [OLRC note: See References in Text note below.] as a dividend from a real estate investment trust notwithstanding any other provision of this title.

(D) Applicable investor For purposes of this subsection, the term “applicable investor” means, with respect to any qualified shareholder holding stock in a real estate investment trust, a person (other than a qualified shareholder) which—

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(p)(2), substituted “subsection” for “paragraph” in introductory provisions.

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(i) holds an interest (other than an interest solely as a creditor) in such qualified shareholder, and

(ii) holds more than 10 percent of the stock of such real estate investment trust (whether or not by reason of the person’s ownership interest in the qualified shareholder).

(E) Constructive ownership rules For purposes of subparagraphs (B)(i) and (D), the constructive ownership rules under subsection (c)(6)(C) shall apply.

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(p)(3), substituted “and (D)” for “and (C) and paragraph (4)”.

(F) Applicable percentage For purposes of subparagraph (B), the term “applicable percentage” means the percentage of the value of the interests (other than interests held solely as a creditor) in the qualified shareholder held by applicable investors.

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(p)(1)(B), added subpar. (F).

(4) Partnership allocations

(A) In general For the purposes of this subsection, in the case of an applicable investor who is a nonresident alien individual or a foreign corporation and is a partner in a partnership that is a qualified shareholder, if such partner’s proportionate share of USRPI gain for the taxable year exceeds such partner’s distributive share of USRPI gain for the taxable year, then

(i) such partner’s distributive share of the amount of gain taken into account under subsection (a)(1) by the partner for the taxable year (determined without regard to this paragraph) shall be increased by the amount of such excess, and

(ii) such partner’s distributive share of items of income or gain for the taxable year that are not treated as gain taken into account under subsection (a)(1) (determined without regard to this paragraph) shall be decreased (but not below zero) by the amount of such excess.

(B) USRPI gain For the purposes of this paragraph, the term “USRPI gain” means the excess (if any) of—

(i) the sum of—

(I) any gain recognized from the disposition of a United States real property interest, and

(II) any distribution by a real estate investment trust that is treated as gain recognized from the sale or exchange of a United States real property interest, over

(ii) any loss recognized from the disposition of a United States real property interest.

(C) Proportionate share of USRPI gain For purposes of this paragraph, an applicable investor’s proportionate share of USRPI gain shall be determined on the basis of such investor’s share of partnership items of income or gain (excluding gain allocated under section 704(c)), whichever results in the largest proportionate share. If the investor’s share of partnership items of income or gain (excluding gain allocated under section 704(c)) may vary during the period such investor is a partner in the partnership, such share shall be the highest share such investor may receive.

(l) Exception for qualified foreign pension funds

§ 1.897(l)-1 Exception for interests held by foreign pension funds.

Amended 1981, 1988, 2015, 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(q)(1), substituted “Exception for qualified foreign pension funds” for “Exception for interests held by foreign pension funds” in heading.
2015 Pub. L. 114-113 Pub. L. 114–113, § 323(a), added subsec. (l).
1988 Pub. L. 100-647 Pub. L. 100–647 struck out subsec. (l) which provided special rule for certain United States shareholders of liquidating foreign corporations.
1981 Pub. L. 97-34 Pub. L. 97–34, § 831(f), (g), added subsecs. (j) to (l).

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(1) In general For purposes of this section, a qualified foreign pension fund shall not be treated as a nonresident alien individual or a foreign corporation. For purposes of the preceding sentence, an entity all the interests of which are held by a qualified foreign pension fund shall be treated as such a fund.

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(q)(1), amended par. (1) generally. Prior to amendment, text read as follows: “This section shall not apply to any United States real property interest held directly (or indirectly through 1 or more partnerships) by, or to any distribution received from a real estate investment trust by—
“(A) a qualified foreign pension fund, or
“(B) any entity all of the interests of which are held by a qualified foreign pension fund.”

(2) Qualified foreign pension fund For purposes of this subsection, the term “qualified foreign pension fund” means any trust, corporation, or other organization or arrangement—

“any trust, corporation, or other organization or arrangement” Opening words

Textual readingALL OF= a qualified foreign pension fund

(A) which is created or organized under the law of a country other than the United States,

(B) which is established—

“any trust, corporation, or other organization or arrangement” Enclosing § 897(l)(2)

Textual readingANY OF= established as a qualifying fund

(i) by such country (or one or more political subdivisions thereof) to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals) or persons designated by such employees, as a result of services rendered by such employees to their employers, or

(ii) by one or more employers to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (including self-employed individuals) or persons designated by such employees in consideration for services rendered by such employees to such employers,

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(q)(2), amended subpar.(B) generally. Prior to amendment, subpar. (B) read as follows: “which is established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (or persons designated by such employees) of one or more employers in consideration for services rendered,”.

(C) which does not have a single participant or beneficiary with a right to more than five percent of its assets or income,

(D) which is subject to government regulation and with respect to which annual information about its beneficiaries is provided, or is otherwise available, to the relevant tax authorities in the country in which it is established or operates, and

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(q)(3), substituted “with respect to which annual information about its beneficiaries is provided, or is otherwise available, to the relevant tax authorities” for “provides annual information reporting about its beneficiaries to the relevant tax authorities”.

(E) with respect to which, under the laws of the country in which it is established or operates—

(i) contributions to such trust, corporation, organization, or arrangement which would otherwise be subject to tax under such laws are deductible or excluded from the gross income of such entity or arrangement or taxed at a reduced rate, or

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(q)(4)(A), substituted “such entity or arrangement” for “such entity”.

(ii) taxation of any investment income of such trust, corporation, organization or arrangement is deferred, or such income is excluded from the gross income of such entity or arrangement or is taxed at a reduced rate.

Amended 2018

2018 Pub. L. 115-141 Pub. L. 115–141, § 101(q)(4)(B), substituted “, or such income is excluded from the gross income of such entity or arrangement or is taxed at a reduced rate” for “or such income is taxed at a reduced rate”.

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(3) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection.