On October 20, 2025, the United States Department of the Treasury and the Internal Revenue Service issued proposed regulations that modify the rules for determining domestically controlled REIT status. Generally, many non-US investors prefer investing in domestically controlled REITs because selling stock in such REITs can qualify for an exemption from the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), which would otherwise impose tax on gains from the sale of REIT stock.
In this alert, we highlight three key takeaways for REITs, fund managers, and non-US investors.
Key highlights
1. Removal of the domestic C-corporation look-through rule
In response to numerous comment letters submitted by taxpayers (including a detailed comment letter submitted by the American Bar Association (ABA) Tax Section, with contributions by DLA Piper Partner Shiukay Hung), the US Treasury reversed its prior “domestic C-corporation look-through rule.” This change generally restores prevailing industry practice prior to 2024, where taxpayers self-created domestically controlled REITs by having a domestic C-corporation hold a 51-percent interest in a REIT. Under the proposed regulations, a domestic C-corporation, excluding REITs and regulated investment companies (RICs), is treated as a non-look-through person in all cases. In particular, the proposed regulations reverse the prior rule that became effective on April 25, 2024. For more information, see our prior client alert and the ABA Tax Section letter.
2. Compliance relief
Eliminating the domestic C-corporation look-through rule is anticipated to simplify the compliance burden for domestically controlled REITs. While the proposed regulations are not yet effective until finalized, taxpayers may choose to apply them to transactions occurring on or after April 25, 2024, effectively undoing the look-through treatment of domestic C-corporations for all time periods.
3. Self-created domestically controlled REITs
With the domestic C-corporation look-through rule effectively repealed, taxpayers may structure self-created domestically controlled REITs through the use of a domestic C-corporation.
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