IRS Takes A Second Look At The FIRPTA Look-Through Rule And Reverses Course

On October 20, 2025, the IRS issued proposed regulations that would revoke the recently adopted "look-through" rule (discussed here) used to determine whether real estate investment trusts ("REITs") are considered "domestically controlled" under the FIRPTA rules. These proposed regulations override existing regulations finalized in 2024, as they may be relied upon immediately. The proposed regulations potentially allow for greater foreign investment in REITs.

Under the Foreign Investment in Real Property Tax Act ("FIRPTA"), foreign investors are generally subject to U.S. tax on any gain or loss from the sale of a "United States real property interest" ("USRPI"). This includes the sale of REIT stock unless the REIT is "domestically controlled." A REIT is domestically controlled if less than 50% of the value of its stock is held directly or indirectly by foreign persons. Prior to the 2024 regulations, many tax practitioners adopted the view that one need not look through a U.S. corporate shareholder of a REIT to its ultimate owners when determining whether the REIT is domestically controlled. Accordingly, foreign investments in REITs were structured using U.S. corporations as "blockers" so that the REIT would be considered domestically controlled. In response, the IRS issued final regulations in 2024 (subject to a 10-year transition period) treating stock in a U.S. corporation as "held directly or indirectly by foreign persons" if foreign persons owned more than 50% (by value) of the corporation's stock. Thus, under the 2024 regulations, foreign persons who sell their REIT shares could be subject to U.S. tax under FIRPTA.

The adoption of the look-through rule received significant pushback from taxpayers and industry groups. Critics argued that the rule was impractical, as it would be difficult to trace ownership through layers of entities, and that Congress was certainly capable of enacting look-through treatment itself had it determined such treatment warranted an explicit provision.

The proposed regulations, which may be relied upon immediately, eliminate the requirement to look through U.S. corporations and thereby effectively revoke the 2024 final regulations.

It should be noted that the proposed regulations do not affect look-through treatment for domestic partnerships, international organizations and qualified foreign pension funds that own REITs or hold other USRPIs. We will continue to monitor this issue inBrass Taxas the IRS finalizes the regulations and provides additional guidance.

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