Section 897(l): FIRPTA Exemption for Foreign Pension Funds

The Section 897(l) FIRPTA exemption lets a qualified foreign pension fund sell U.S. real estate, or receive capital gain distributions tied to U.S. real estate, without paying U.S. tax on the gain and without the 15% FIRPTA withholding that normally hits foreign sellers. The statute achieves this by declaring that a qualifying fund is “not treated as a nonresident alien individual or a foreign corporation” for FIRPTA purposes.¹ To use it, the fund has to meet five statutory tests, hold the U.S. real property through a properly structured account, and certify its status to the withholding agent.

What the Exemption Covers

FIRPTA normally treats any gain a foreign person realizes on a U.S. real property interest as income effectively connected with a U.S. trade or business, taxable regardless of whether the seller has any other U.S. presence, and it forces the buyer to withhold 15% at closing. Section 897(l) removes qualified foreign pension funds from that regime entirely.

The exemption reaches broadly. It applies to U.S. real property interests held directly, through partnerships, and through tiered structures, and it applies to capital gain distributions from a REIT that are attributable to the REIT’s sales of U.S. real property.² Those distributions would otherwise be treated as if the fund had sold the property itself and taxed accordingly. Under 897(l), they pass through tax-free.³

One boundary matters for funds that hold REIT shares. Ordinary REIT dividends, meaning the portion of a distribution not attributable to property sales, sit outside FIRPTA to begin with. They remain subject to the standard 30% withholding on U.S.-source income paid to foreign persons, reduced by any applicable treaty. Section 897(l) does not touch that separate withholding.

Five Tests a Fund Must Meet

The statute defines a qualified foreign pension fund through five conditions. All must be satisfied at once; failing any one disqualifies the fund.¹

The fund is created or organized under the laws of a country other than the United States. A domestic trust or corporation cannot qualify even if all its beneficiaries are foreign.
The fund is established either by a foreign government (or a political subdivision) or by one or more employers to provide retirement or pension benefits to current or former employees, self-employed individuals, or persons those employees designate. A vehicle set up for private investment with no genuine retirement function fails this test.
No single participant or beneficiary has a right to more than 5% of the fund’s assets or income. Treasury regulations aggregate rights held by related persons, so family members are counted together against the threshold.⁴
The fund is subject to government regulation in the country where it is established or operates, and it either provides annual information about its beneficiaries to that country’s tax authorities or makes that information available to them.
The fund receives some form of favorable tax treatment at home. That can mean deductible or excluded contributions, tax-deferred or tax-exempt investment earnings, or a reduced rate on either contributions or earnings. Any one of these arrangements meets the test.

The 5% cap is where borderline cases usually surface. A restructuring that pushes one participant’s share above the threshold can cost the fund the exemption for every U.S. property it holds.

Holding the Real Estate Through a Subsidiary

Large pension funds rarely buy U.S. real estate in their own name. Section 897(l) extends the exemption to any entity whose interests are entirely held by one or more qualified foreign pension funds. The regulations label these “qualified controlled entities”: trusts or corporations organized under foreign law with all interests held by qualifying funds, either directly or through a chain of other qualified controlled entities.⁴

Ownership has to be complete. A single outside investor at any tier breaks the exemption for that entity, and a disqualified entity in the middle of a chain breaks it for everything below. Funds using multi-tier holding structures need to confirm that every link satisfies the rule.

The Segregated Account Rule

The final Treasury regulations added a limitation the statute alone does not spell out. The FIRPTA exemption applies only to gains attributable to “qualified segregated accounts” maintained by the fund or its qualified controlled entities.⁴ A qualified segregated account is an identifiable pool of assets maintained solely to fund qualified retirement benefits to qualified recipients.

In practice, a fund cannot mix non-retirement assets with pension assets in the same account and then claim 897(l) on the whole thing. The U.S. real property investments must be traceable to assets held for the purpose of paying retirement benefits. Funds that already segregate assets by purpose treat this as bookkeeping. Funds with looser accounting can lose the exemption on that ground alone.

Certifying the Exemption to the Withholding Agent

A qualified foreign pension fund claims 897(l) by giving Form W-8EXP to the withholding agent, which is usually the buyer in a direct sale or the REIT’s transfer agent for a distribution. The instructions to the form confirm that a “withholding qualified holder” uses W-8EXP to establish that it is treated as a non-foreign person under Section 897(l).⁵ The form requires the fund’s legal name, country of incorporation, and taxpayer identification number if one has been assigned.

On the form, the fund checks the certification box confirming it qualifies as a withholding qualified holder under Treasury Regulation Section 1.897(l)-1(d).⁶ Keep the underlying documentation ready: evidence of home-country regulation and tax-favored status may be requested by the withholding agent or the IRS. A withholding agent that receives a properly completed W-8EXP may rely on it to forgo the 15% FIRPTA withholding, provided the agent has no actual knowledge or reason to know the form is unreliable.

Recovering FIRPTA Tax Already Withheld

Withholding sometimes happens before the fund’s status is established, either because the W-8EXP did not reach the buyer in time or because the parties were not aware of the exemption. The fund can respond by filing Form 8288-B, an application for a withholding certificate to reduce or eliminate the tax withheld on a disposition of a U.S. real property interest.⁷

The IRS typically acts on the application within 90 days of receiving the information it needs to make a determination.⁸ If the application is filed on or before the date of the sale and is still pending at closing, the buyer must withhold the 15% but does not have to remit it to the IRS immediately. The withheld amount is held until the IRS issues a withholding certificate or denies the application, and the buyer then has 20 days to report and pay whatever the IRS determines is owed.⁹ Because the withholding agent remains responsible for the funds until the IRS resolves the application, ask the buyer to keep the amount in a segregated account while the certificate is pending.

1
Office of the Law Revision Counsel. 26 USC 897 – Disposition of Investment in United States Real Property
2
Internal Revenue Service. FIRPTA Withholding
3
Office of the Law Revision Counsel. 26 U.S. Code 897 – Disposition of Investment in United States Real Property
4
eCFR. 26 CFR 1.897(l)-1 – Exception for Interests Held by Foreign Pension Funds
5
Internal Revenue Service. Instructions for Form W-8EXP (10/2023)
6
Internal Revenue Service. Form W-8EXP – Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting
7
Internal Revenue Service. About Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests
8
Internal Revenue Service. Form 8288-B (Rev. December 2025)
9
Internal Revenue Service. Reporting and Paying Tax on U.S. Real Property Interests