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Final Treasury Regulations Implement a 10-Year Transition Rule for Existing Domestically Controlled REITs

Daniel Martinez, David S. Resnick & Shawn P. Wolf

IntroductionDomestic REITs Blog Post Image

The U.S. Department of the Treasury (the “Treasury”) and the Internal Revenue Service (the “IRS”) have recently issued final regulations (the “Final Regulations”) that significantly impact the determination of whether a real estate investment trust (“REIT”) or other qualified investment entity is considered “domestically controlled” under the Foreign Investment in Real Property Tax Act (“FIRPTA”). These Final Regulations retain, with some modifications, the limited look-through approach introduced in the previously issued proposed regulations. The Final Regulations, however, introduce an important 10-year transition period that existing REIT structures can use to maintain their domestically controlled status.

The Importance of Domestically Controlled Status

FIRPTA generally subjects foreign persons to U.S. federal income tax on any gain realized from the disposition of a U.S. real property interest (“USRPI”), including an interest in a U.S. real property holding corporation. However, an important exception exists for interests in a “domestically controlled” REIT. If a REIT is deemed domestically controlled, meaning less than 50% of its stock (by value) has been held directly or indirectly by foreign persons during the applicable testing period, then its equity interests are not treated as USRPIs. This allows foreign investors to sell their shares in a domestically controlled REIT without triggering FIRPTA taxation.

Prior to these regulations, there was limited guidance on how to determine “indirect” ownership of a REIT by a foreign person. Taxpayers have relied on a private letter ruling that conclude that a REIT does not need to look at the ownership of a nonpublic domestic C-corporation.

The Proposed Regulations and Taxpayer Concerns

On December 29, 2022, the Treasury and IRS released proposed regulations that sought to clarify the meaning of “indirect” ownership for purposes of the domestically controlled test. These proposed rules introduced a “look-through” approach, requiring REITs to examine the direct and indirect beneficial ownership of certain shareholders to determine their domestically controlled status.
The proposed regulations generated significant concerns within the industry, particularly regarding the potential impact on existing investment structures. Stakeholders were concerned that the new look-through rules could cause many existing REITs to fail the domestically controlled test, even if their overall foreign ownership had not changed.

The Final Regulations: Key Provisions

The Final Regulations, released on April 24, 2024, generally adopt the proposed look-through framework, with several notable modifications:

Increased Foreign Ownership Threshold for Nonpublic Domestic C-Corporations
The Final Regulations increase the foreign ownership threshold for nonpublic domestic C-corporations from 25% (in the proposed regulations) to more than 50% of the fair market value of the corporation’s outstanding stock before the look-through rules apply. This change provides some relief for taxpayers.

Treatment of Qualified Foreign Pension Funds (“QFPFs”)
Consistent with the proposed regulations, the final rules confirm that QFPFs and their wholly-owned subsidiaries (qualified controlled entities) are treated as foreign persons for purposes of the domestically controlled test, even if they qualify for the FIRPTA exception under Section 897(l).

Actual Knowledge Override for Certain Public Entities
The Final Regulations introduce an “actual knowledge” override for certain publicly traded entities. If a REIT has actual knowledge that a shareholder owning less than 5% of its publicly traded stock, a publicly traded domestic corporation, or a publicly traded domestic partnership is foreign-controlled, these entities will be treated as look-through persons rather than non-look-through persons.

Non-Look-Through Treatment for Publicly Traded RICs
The Final Regulations extend non-look-through treatment to publicly traded regulated investment companies that are not qualified investment entities, provided they meet certain criteria related to public trading or continuous public offerings.

Lack of Guidance on Identification and Certification Procedures
Notably, the Final Regulations do not provide any specific guidance, sample certifications, or procedures for REITs to identify their non-look-through person owners or for domestic C-corporations to certify that they are not foreign-controlled.

The 10-Year Transition Rule: Key Requirements
Perhaps the most significant development in the Final Regulations is the inclusion of a 10-year transition rule for existing domestically controlled REITs. This transition period can provide relief for REITs that would otherwise lose their domestically controlled status solely due to the new look-through rules for nonpublic domestic C-corporations.

To qualify for the transition rule, an existing REIT must satisfy the following three requirements:

1. Domestically Controlled Status: The REIT must be domestically controlled (determined without regard to the new look-through rule for nonpublic domestic C-corporations) at all times on and after April 24, 2024.
2. USRPI Acquisition Limit: The aggregate fair market value of any USRPIs acquired by the REIT after April 24, 2024, must not exceed 20% of the aggregate fair market value of the USRPIs held by the REIT as of that date.
3. Ownership Increase Limit: The percentage of the REIT’s stock held directly or indirectly by one or more non-look-through persons (as determined under the Final Regulations) cannot increase by more than 50% in the aggregate over the percentage of stock owned by such non-look-through persons on April 24, 2024.

The transition rule will cease to apply, and the new look-through rules will fully apply, on the earlier of April 24, 2034, or the day immediately following the day the REIT fails to satisfy any of the three requirements.

Existing domestically controlled REITs will need to closely monitor and manage any changes in ownership, including transfers between existing investors, to avoid exceeding the 50% increase in ownership by non-look-through persons. Additionally, REITs that are still actively acquiring new USRPI assets will need to carefully structure these acquisitions to ensure they do not exceed the 20% fair market value limit, potentially requiring the use of separate investment vehicles outside the existing REIT.

Responding to the Final Regulations

The Treasury and IRS’s Final Regulations on domestically controlled REITs represent a significant development in the FIRPTA landscape. While the new look-through rules introduce additional complexity, the 10-year transition period provides a critical opportunity for existing REIT structures to preserve their domestically controlled status. Key steps to respond to these new regulations include:
1. Reviewing current REIT ownership structures and contractual obligations to investors to assess compliance with the new rules, including the transition requirements.
2. Developing strategies to manage new USRPI acquisitions and ownership changes within the transition period guidelines.
3. Implementing enhanced investor onboarding and information gathering procedures to identify non-look-through persons and determine the status of look-through persons.

By proactively addressing the implications of these Final Regulations, REIT sponsors and managers can navigate the new landscape and maintain the valuable FIRPTA exemption for their foreign investors. 

1. 89 FR 31618.  Although the regulations apply to qualified investment entities, which include REITs and RICs, this discussion focuses solely on REITs.
For a summary of the prior proposed regulations, see “Proposed Regulations May Affect Taxation of Foreign Investors in REITs,” available at
See, e.g., “Comment from The Real Estate Roundtable and others,” available at; “Comments to the Proposed Regulations on Domestically Controlled QIEs,” available at

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