Favorable Proposed Domestically Controlled REIT Regulations

October 23, 2025 | By: John Troth, Partner, M&A Tax, and Connie Lee, US Inbounds Tax Leader

On October 20, 2025, the IRS proposed taxpayer-friendly regulations that reversed previously released guidance relating to the determination as to whether a REIT will be considered domestically-controlled.

Key Takeaway: The proposed regulations restore the ability of foreign taxpayers to proactively structure REIT investments to take advantage of the domestically-controlled REIT exception to FIRPTA. Foreign taxpayers that are not otherwise FIRPTA-exempt generally will benefit from this change through reduced taxation of exit proceeds received on the shares of stock that would otherwise be subject to FIRPTA taxation. Because the domestic corporation used to implement the structuring will pay US tax on its REIT income (dividends as well as gain on exit), modeling is recommend to determine whether it is tax-efficient to set up this structure to avoid FIRPTA gain.

Background

Generally, a foreign investor is subject to FIRPTA tax on a sale of REIT; however, an exemption is available if the REIT is domestically controlled, which is a REIT with less than 50% of the value of its stock held “directly or indirectly” by foreign persons during a five-year period ending on the sale date or the period which the REIT was in existence, if shorter.

Under the regulations finalized in April 2024, a “look-through” rule is applied to determine if a domestic corporation is foreign-owned. Generally, a “foreign-owned” domestic corporation is a privately-held domestic corporation, 50% or more of the stock of which is owned, directly or indirectly, by foreign shareholders.

Prior to the 2024 regulations, many investors took the position that a domestic corporation counted as a domestic shareholder even if the majority of its shareholders were foreign persons.

Proposed Regulations

In the newly proposed regulations, the IRS indicated that it had received comments from taxpayers criticizing the 2024 regulations, focusing on, among other things, the inability to trace upstream ownership resulting in complexity and uncertainty in determining whether a REIT is domestically-controlled. Further, the IRS stated that it shared the commentators’ view that the look-through rule was inconsistent with the statute and legislative intent.

Accordingly, the IRS’s proposed regulations treat all domestic corporations as non-look through persons, regardless of the foreign ownership percentage of such corporations.

Effective Date

Once finalized, taxpayers may apply the regulations to transactions occurring on or after April 25, 2024. Moreover, taxpayers may rely on the proposed regulations for transactions occurring before the date the proposed regulations are finalized.

Conclusion

The proposed regulations provide a path forward for foreign investors to be exempt from FIRPTA tax when selling REIT shares. To reduce a REIT’s percentage ownership by foreign investors, foreign investors can now form a domestic corporation to hold a sufficient number of REIT shares so that, together with other US shareholders, the REIT will qualify as domestically-controlled.