Posted by Asha Shettigar and Agata Orzechowska
On October 21, 2025, the U.S. Treasury and the IRS published proposed regulations that could encourage more foreign investment in the U.S. real estate market. Specifically, the regulations propose to remove the domestic C Corporation look-through rule adopted in final regulations released in 2024. REITs, particularly private REITs, with foreign investor participation will want to take time to assess the impact of this recent development.
Domestically controlled REITs are not treated as U.S. real property interests under the Foreign Investment in Real Property Tax Act (FIRPTA). Consequently, foreign investors are generally not subject to U.S. tax on the sale of REIT shares. This framework has historically led foreign investors to use U.S. blocker entities when investing in U.S. real estate structures.
A REIT is treated as domestically controlled if at all times during the applicable testing period — generally the five year period preceding the disposition of the REIT shares — foreign persons directly or indirectly own less than 50% of the fair market value of the REIT’s stock.
On April 24, 2024, the IRS issued final regulations that included rules to determine whether or not REITs and other qualified investment entities are domestically controlled. They included a look-through rule for nonpublic domestic C Corporations owned by more than 50% of foreign persons.
That look-through rule drew substantial criticism from taxpayers, tax practitioners and the broader business community. The rule’s significant compliance burdens created concerns it could discourage investment in U.S. real estate.
Under the 2025 proposed regulations, all domestic C Corporations, public or private, are treated as non-look-through entities when determining a REIT’s “domestically controlled” status.
Under these rules, a domestic C Corporation may now be wholly foreign owned without jeopardizing a REIT’s domestically controlled classification. This represents a significant development for private REITs, which are frequently formed within private investment fund structures (often involving domestic blocker corporations) or joint venture arrangements.
The proposed change applies solely to domestic C Corporations and eliminates the requirement to look through those entities to their shareholders. In contrast, passthrough entities — such as partnerships and limited liability companies (LLCs) that have not made a corporate tax election — as well as nonpublic REITs, nonpublic Regulated Investment Companies (RICs), S Corporations and trusts continue to be treated as look-through entities under existing rules.
Taxpayers may rely on the proposed regulations immediately, and, if finalized as written, they will apply retroactively to transactions on or after April 25, 2024. This would effectively override the current regulations issued on April 24, 2024, and reinstate the prior rules.
In practical terms, the 2025 proposed regulations should be considered a pro investment development, as they restore certainty around the domestically controlled REIT exception, preserve FIRPTA efficient exit strategies and support continued foreign capital inflows into U.S. real estate. For foreign investors already invested in or considering private REIT structures using domestic blockers, the change meaningfully reduces tax risk and structural complexity.
Talk with your tax advisers about how these proposed regulations could impact your domestically controlled REIT.
Contact Agata Orzechowska, Asha Shettigar or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.