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May 13, 2024

Nelson Mullins Tax Report – IRS Finalizes Look-Through Rule for Domestically Controlled REITs

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

On April 24, 2024, the Internal Revenue Service (IRS) published final regulations that address when a real estate investment trust (REIT) qualifies as domestically controlled under Section 897(h) of the Internal Revenue Code. Specifically, the regulations finalize a new rule that looks through certain U.S. C corporations if they have more than 50% foreign ownership. This new rule is narrower in scope than the original look-through rule proposed in 2022 and comes with a 10-year transition rule that grandfathers in current structures. 

Domestically Controlled REITs—Background

An interest in a domestically controlled REIT is not a U.S. real property interest.[1]  As a result, foreign persons are not subject to the Foreign Investment in Real Property Tax Act (FIRPTA) on their sale of domestically controlled REIT stock. A REIT is considered domestically controlled if foreign persons hold directly or indirectly less than 50% 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 2022 Proposed Regulations

On December 28, 2022, the IRS issued proposed regulations that introduced a new look-through rule for U.S. corporations. The preamble to the proposed regulations recognized that U.S. C corporations are generally a blocker and not looked through for purposes of the domestically controlled REIT test.[3] However, the proposed regulations created a new exception for non-publicly traded U.S. C corporations if foreign persons hold 25% or more of the fair market value of the corporation’s outstanding stock. In effect, the U.S. corporation would now be treated as a conduit for purposes of calculating whether the REIT was domestically controlled. The stock held by the U.S. corporation would instead be treated as held proportionately by the corporation’s shareholders, partners or beneficiaries. Most alarmingly, the proposed regulations were to apply to transactions occurring on or after the date on which the regulations became final, with no transitional relief provided for entities in existence before the new look-through rule was proposed.   

The Final Regulations

The proposed regulations were largely kept intact when the final regulations were released on April 24, 2024. The final regulations did make an important change to the look-through rule. The final regulations increase from 25% to 50% the threshold of foreign ownership required to look through a non-publicly traded U.S. C corporation.[4] Additionally, the final regulations provide a 10-year transition rule for REIT structures already in place. Under this transition rule, U.S. corporations that own REIT shares will be treated as domestic C corporations (and not foreign-owned domestic C corporations), even if they would be looked through under the final regulations. To qualify for the transition rule, a REIT cannot acquire a significant amount of new U.S. real property interests and cannot have a significant change in ownership.[5]

The first requirement means U.S. real property interests acquired after April 25, 2024, cannot exceed 20% of the total fair market value of all of the U.S. real property interests held by the REIT. With respect to the second requirement, a significant change in ownership occurs if the ownership held by non-look-through persons (applying the final 50% threshold rule in the final regulations) has increased by more than 50 percentage points in the aggregate relative to the stock owned by non-look through persons on April 24, 2024. 

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.


[1] IRC § 897(h)(2).

[2] PLR 200923001 (Feb. 26, 2009).  While private letter rulings are not binding on the Internal Revenue Service, they are nonetheless illustrative and helpful guidance for taxpayers. 

[3] REG-100442-22

[4] Treas. Reg. §§ 1.897-1(c)(3)(iii)(B) and 1.897-1(c)(3)(v)(B).

[5] Treas. Reg. §§ 1.897-1(c)(3)(vi)