HOUSE OVERSIGHT 026831 A. Raw Land Investment. A qualifying foreign pension fund invests in a partnership that buys raw land in the United States. (This could be a vacant lot, timberland, oil and gas or mineral property, or other property interests that qualify for treatment as real property for federal income tax purposes.) The investment is a capital asset, as the partnership is not engaged in business. The partnership later sells the property to a developer, or the pension fund sells its partnership interest. Under prior law, the foreign pension fund's non-business capital gain would automatically be subject to US federal income tax because of FIRPTA. Under the new law, the foreign pension fund's long-term or short-term capital gain is exempt from U.S. income tax and FIRPTA withholding because FIRPTA does not apply. B. Equity Kicker Mortgage Loan Investment. A foreign pension fund acquires an ownership interest in a mortgage loan secured by U.S. real property. The loan includes stated interest plus an equity kicker (e.g., additional interest equal to a share of gain realized on sale of the property). Such an equity kicker loan is treated as a U.S. real property interest under FIRPTA. Under prior law, gain realized by the foreign pension fund upon sale of the loan would automatically be subject to U.S. income tax under FIRPTA. Under new law, the gain realized on the sale of the mortgage loan would be exempt from U.S. income tax. (This conclusion is based on the assumption that the foreign pension fund is a mere investor and not engaged in an active lending business in the U.S.) C. U.S. Blocker Corp. Investment. A foreign pension fund wants to make an equity investment in a U.S. real estate business that is organized as a partnership. The foreign pension fund forms a U.S. corporation to acquire the partnership interest and the corporation is capitalized with a mix of equity and debt held by the shareholder. The corporation is subject to U.S. inc