REIT Tax Compliance Update: Overview of Proposed IRS Regulations
On October 20, 2025, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) released proposed regulations under IRC Section 897 that would significantly change how real estate investment trusts (REITs) determine their “domestically controlled” status. The proposed rules would eliminate the look-through requirement for domestic C corporations, simplifying ownership analysis for REIT sponsors and investors.
Understanding Domestically Controlled REIT Status and USRPI Tax Implications
Under current law, foreign investors are generally subject to U.S. tax on gains from U.S. real property interests (USRPI), including certain REIT holdings. However, if a REIT is “domestically controlled,” meaning less than 50% of its stock is held directly or indirectly by foreign persons over a five-year period, foreign investors can avoid USRPI treatment on REIT sales.
The 2024 Final Regulations introduced a nuanced approach, requiring a look-through to shareholders for certain non-public, foreign-controlled domestic C corporations. This added complexity for REIT sponsors and investors, especially those with cross-border ownership structures.
The new proposed regulations reverse course. The proposed regulations include language that permits domestic C corporations, as entities subject to U.S. tax, to be treated as non-look-through persons, regardless of their ownership. This means all domestic C corporations would be counted as U.S. persons for purposes of the domestically controlled REIT test, streamlining compliance and reducing uncertainty.
Effective Dates and Transition for IRS REIT Ownership Regulations
The proposed regulations, once finalized, will apply to transactions occurring on or after October 20, 2025. However, taxpayers have the flexibility to elect retroactive application of the final regulations to transactions dating back to April 25, 2024.
In addition, taxpayers may rely on the proposed regulations for transactions that take place before the regulations are officially finalized. In practical terms, this means the domestic corporation look-through rule is effectively revoked for both current and prior transactions, providing immediate clarity and simplification for REIT sponsors and investors navigating ownership requirements.
Key Implications for REIT Sponsors and Cross-border Investors
In summary, the following points highlight the primary areas of change and consideration introduced by the IRS’s proposed regulations:
- Simplified Ownership Analysis: REITs can now treat all domestic C corporations as U.S. persons, making it easier to maintain domestically controlled status.
- Retroactive Application: Taxpayers may rely on the proposed regulations for transactions dating back to April 25, 2024, and the rules will apply to transactions on or after October 20, 2025, once finalized.
- Transition Rule Removed: The prior 10-year transition rule for existing entities is eliminated, further simplifying the landscape.
What Should REIT Sponsors and International Real Estate Investors Do Now?
Review Ownership Structures
Sponsors should revisit their REIT ownership analysis to determine if the proposed rules affect their domestically controlled status.
Consider Cross-border Impacts
Investors with foreign ownership should assess whether the removal of the look-through rule changes their tax exposure or exit strategy.
Stay Tuned for Final Guidance
While these are proposed regulations, they signal a clear intent from Treasury and IRS. Cherry Bekaert will continue to monitor developments and provide timely updates.
How Cherry Bekaert Supports REIT Compliance
These proposed regulations are expected to simplify compliance and provide greater certainty for REIT sponsors and investors. Our Real Estate and Tax teams are experienced in navigating REIT structuring, cross-border investment and regulatory changes.
We work closely with clients to analyze and document domestically controlled REIT status, model tax impacts for both foreign and domestic investors, and advise on compliance and reporting as IRS guidance evolves. If you have questions about how these proposed regulations may affect your REIT or investment strategy, please contact your trusted Cherry Bekaert advisor.
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