On October 20, 2025, the Internal Revenue Service (“IRS”) announced a proposed regulation that, if finalized, withdraws last year’s domestic corporation look-through rule for determining whether a real estate investment trust (“REIT”) is domestically controlled.  In the interim, taxpayers may rely on this proposed regulation. 

Domestically Controlled REITs—Background

The Foreign Investment in Real Property Tax Act (“FIRPTA”) taxes foreign investors on their sale of U.S. real property interests.  However, an interest in a domestically controlled REIT is not a U.S. real property interest.[1]  Accordingly, foreign persons are not subject to FIRPTA, and thus not subject to U.S. taxation, on their sale of domestically controlled REIT stock.

A REIT is considered domestically controlled if foreign persons hold directly or indirectly less than fifty percent of the fair market value of the REIT stock at all times during the relevant testing period, which generally is the five-year period preceding the sale of the shares. Many foreign investments in REITs are structured through U.S. corporations to benefit from this FIRPTA exception, a structure which was allowed by the IRS in a 2009 private letter ruling.[2]

The Current Regulatory Look-Through Rule

On April 24, 2024, the IRS issued final regulations that looked through certain domestic corporations if they have more than fifty percent foreign ownership. This final look-through rule was narrower in scope than the original look-through rule proposed in 2022, which looked through domestic corporations if they had twenty-five percent or more foreign ownership.  While more narrow in scope, the final look-through rule was nonetheless the subject of negative taxpayer feedback.  Based on this month’s announcement, the IRS was listening.

The Proposed Withdrawal of the Look-Through Rule

On October 20th, the IRS issued a proposed regulation that completely withdraws the domestic corporation look-through rule.[3]  In doing so, the Treasury Department and the IRS explained that they shared concerns raised by taxpayers that there were practical difficulties in trying to trace through upstream ownership to apply the look-through rule.  This resulted in legal uncertainty, operational complexity, and a potentially chilling effect on investment in U.S. real estate.  They further recognized that as domestic corporations are subject to U.S. corporate income tax, the objectives of FIRPTA are satisfied without having to look through domestic corporations. 

The proposed regulation, if finalized, would apply to transactions on or after October 20, 2025.  Additionally, if the proposed regulation is finalized, taxpayers will be permitted to apply the final regulation retroactively, once published in the Federal Register, to transactions occurring on or after April 25, 2024 (the date the current rules were finalized).  Finally, and of particular immediate benefit, taxpayers are allowed to rely on the proposed regulation now. 

This change only affects the requirement to look through a domestic C corporation to its shareholders. Passthrough entities, such as partnerships and limited liability companies that have not elected out of the default rules applicable to limited liability companies, remain subject to the existing look through rules.

Nelson Mullins will continue to monitor the status of the domestically controlled REIT rules and provide updates as appropriate. If you have any questions or comments about the foregoing summary of the proposed regulations, please contact the contributing authors of this Report, or any other member of the firm’s tax practice group.

Michael K. Rafter, Howard Hirsch, C. Wells Hall, III, Maurice D. Holloway, Tim Wagner, Amanda Wilson, Seth Proctor