Proposed Change to Domestically Controlled REIT Determination Would Have Beneficial Impact on Foreign Investment in REITS

On October 20, 2025, the IRS proposed regulations (REG-109742-25) that seek to modify existing regulations by removing the “look through” rule that looks to the shareholders of certain domestic corporations in determining whether real estate investment trusts (REITs) or regulated investment companies are considered to be domestically controlled for purposes of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

Summary: The proposed regulations would modify existing regulations on the determination of whether a REIT is domestically controlled by removing a rule that looks to the shareholders of certain domestic corporations that own REIT stock in determining whether the REIT is domestically controlled. The proposed regulations would primarily affect foreign persons that own stock in a REIT that would be a United States real property interest if the REIT was not domestically controlled. This proposed modification to the existing regulations would facilitate investment in REITs by foreign persons on a more tax-efficient basis.

Background: Under FIRPTA, a non-U.S. person’s sale or disposition of a United States real property interest (USRPI) is generally subject to U.S. federal income tax and a tax return reporting requirement. Under FIRPTA, the purchaser of a USRPI from a non-U.S. person is generally required to withhold tax equal to 15 percent of the seller’s amount realized on the sale. USRPIs include stock in a U.S. corporation whose assets are largely comprised of other USRPIs. Thus, stock in a REIT is generally a USRPI. However, stock in a domestically controlled REIT is not treated as a USRPI and therefore the sale of shares of a domestically controlled REIT by a foreign person is not subject to U.S. taxation under FIRPTA. This exception allows foreign investors in a REIT to sell shares of the REIT without the gain being subject to U.S. federal income tax. A REIT is considered to be domestically controlled if less than 50 percent of the value of the REIT shares is held “directly or indirectly” by foreign persons for at least five years prior to the date of disposition (or, if shorter, the period during which the REIT was in existence).

On April 25, 2024, the IRS and Treasury Department published final regulations for determining whether qualified investment entities (QIEs), which include REITs, are considered domestically controlled for purposes of the FIRPTA rules of IRC Section 897.

The final regulations set forth a rule under which, for purposes of determining whether the REIT is domestically controlled, the REIT is required to look through to the owners of the REIT’s non-publicly traded domestic C corporation shareholders that are more than 50% owned, directly or indirectly, by foreign persons. The final regulations refer to a C corporation that is more than 50% owned by foreign persons as a “foreign-controlled domestic corporation”.

Thus, looking through a REIT’s foreign-controlled domestic corporation shareholders makes it more likely that the REIT would not be domestically controlled, and therefore that the REIT stock would be treated as a USRPI. The final regulations also provided a new transition rule that exempts existing structures from the final look-through rule for a 10-year period, provided that such REITs do not acquire a significant amount of new U.S. real estate or undergo significant changes in shareholder ownership.

Explanation of Provisions: The IRS and Treasury Department received feedback from taxpayers following the issuance of the 2024 final regulations recommending the withdrawal of the domestic corporation look-through rule, given the practical difficulty of tracing upstream ownership, often without access to reliable data, resulting in legal uncertainty, operational complexity, and potentially negative effects on investment in U.S. real estate. In addition, taxpayers argued that the domestic corporation look-through rule is inconsistent with the statute and conflicts with congressional intent. They further argued that the interests held by a domestic corporation are subject to U.S. corporate income tax and therefore the objective of IRC Section 897 is satisfied without looking through a domestic corporation. In response to these concerns, the Treasury Department and the IRS issued proposed regulations on October 20, 2025, that would remove the domestic corporation look-through rule and thus treat all domestic C corporations as non-look-through persons in determining whether a QIE is domestically controlled.

By reverting to the rules in place prior to the issuance of the final look-through regulations discussed above, the proposed regulations would have a significant beneficial impact on structuring of foreign investment in REITs and would encourage more foreign investment in private REITs by making it easier to do so without subjecting foreign investors to tax under FIRPTA and the associated U.S. tax return filing requirements that arise upon a disposition of a foreign investor’s interest in the stock of either the REIT itself or a domestic C corporation that has invested in the REIT. The proposed regulations, if finalized, would apply to transactions occurring on or after the date on which published in the Federal Register. However, once published in the Federal Register, taxpayers may apply the final regulations retroactively to transactions occurring on or after April 25, 2024, as well as certain transactions occurring prior to such date. Furthermore, taxpayers may also choose to rely on the proposed regulations for transactions occurring on or after April 25, 2025, and prior to the date on which they are finalized.

Real estate funds and joint ventures utilizing REITs should review the potential impact of these proposed regulations on their current structure.

If you have any questions on these final regulations, please contact Stephen Lee, Michael Mishik, Fred Corso, or your Citrin Cooperman professional.