Treasury Proposes Regulations Removing Recently Enacted, Taxpayer-Unfriendly Look-Through Rule for Purposes of Domestically Controlled REIT Status

On October 21, 2025, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) published proposed regulations (REG-109742-25) that would remove the domestic C corporation look-through rule adopted in the April 2024 final regulations under Section 897 of the Internal Revenue Code of 1986, as amended (the Code).¹ These rules determine whether a real estate investment trust (REIT) is “domestically controlled” under Section 897(h)(4)(B) of the Code.²

Section 897, commonly known as the Foreign Investment in Real Property Tax Act (FIRPTA), subjects a nonresident alien individual or foreign corporation to U.S. federal income tax on gains realized from the disposition of a U.S. real property interest (USRPI). A USRPI generally includes an interest in real property located in the United States or the Virgin Islands, and any interest (other than solely as a creditor) in a United States real property holding corporation (USRPHC), which generally is a domestic corporation, including a REIT, if at least 50% of its assets by value are USRPIs at any time during the applicable testing period.

Under Section 897(h)(2), stock in a “domestically controlled” REIT is not treated as a USRPI, allowing foreign investors to sell such stock without triggering U.S. tax under FIRPTA. Under Section 897(h)(4)(B), a REIT is considered “domestically controlled” if less than 50% of the value of its stock is held “directly or indirectly” by foreign persons at all times during the applicable testing period (generally, the five-year period ending on the date of the disposition of the REIT’s stock).

The 2024 Final Regulations adopted a newly created limited look-through rule for non-public domestic C corporations owned more than 50% by foreign persons, thereby changing the long-established IRS position on this issue (i.e., no look-through of privately held domestic C corporations).³ The new proposed regulations would withdraw that 2024 change of law and revert back to the old IRS position that all domestic C corporations—whether public or private—are non-look-through persons for purposes of determining whether a REIT is “domestically controlled.” Accordingly, the proposed regulations provide that a domestic C corporation—whether public or private—may now be 100% foreign owned without negatively affecting a REIT’s domestically controlled status. This is an important development for private REITs, often established in the context of private investment fund vehicles (which may include so-called domestic “blocker” corporations) or joint venture–type transactions.

The Treasury Department and the IRS stated that they received feedback from taxpayers expressing concerns about the practical difficulty of tracing upstream ownership, which created legal uncertainty, operational complexity, and potentially chilling effects on investment in U.S. real estate. Taxpayers also argued that the domestic C corporation look-through rule was inconsistent with the statute and conflicted with congressional intent, noting that Section 897(h)(4)(B) does not include an express corporate look-through provision. In response, Treasury and the IRS concluded, likely in light of the Supreme Court’s Loper Bright decision,⁴ that imposing look-through treatment on domestic C corporations subject to U.S. tax based on a 50% foreign ownership threshold is not the construction that should be given to Section 897(h)(4)(B) when interpreted using traditional tools of statutory construction and consideration of the provision’s purpose.

Importantly, the proposed regulations do not alter other aspects of the April 2024 final regulations, including the look-through treatment of partnerships, RICs, and REITs. The transition rule included in the April 2024 regulations (which exempted REITs that were in existence on April 24, 2024, from the limited look-through rule for privately held domestic C corporations for a 10-year period if the REIT satisfied certain requirements) has been eliminated, and in its place, the proposed regulations provide that taxpayers may elect to apply the new rules, once finalized, to transactions occurring on or after April 25, 2024, which was the date when the prior final regulations were issued. This approach effectively allows taxpayers to elect to treat the look-through rule for privately held domestic C corporations as though it never applied.

Taxpayers may rely on these proposed regulations for transactions occurring before they are finalized.

For background on the prior regulatory framework and the 2024 Final Regulations, see our May 1, 2024 Client Alert, “Final Treasury Regulations on the Definition of Domestically Controlled REITs.”

¹ All “Section” references herein are to the Code.
² The April 2024 final regulations and the new proposed regulations also apply to a regulated investment company (RIC) that is (or would be, absent certain exceptions) a USRPHC. This overview, however, focuses on REITs because REITs are more likely than RICs to be USRPHCs that could benefit from the “domestically controlled” exception, and nonresident alien individuals and foreign corporations are more likely to invest in REITs than in RICs.
³ In a widely cited and discussed private letter ruling (PLR) from 2009, the IRS concluded that a domestic C corporation would not be looked through for purposes of determining whether a REIT is domestically controlled. PLR 200923001 (June 5, 2009). While only the taxpayer to whom the PLR was issued can rely on the PLR, the PLR was understood by other taxpayers to be indicative of the IRS’s position.
⁴ In Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), the Supreme Court overturned Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), and held that courts must exercise their own independent judgment in determining the best interpretation of a statute. Under Loper Bright, a regulation is valid only if it reflects the best reading of the statute, rather than merely a permissible one.