A major tax change is on the horizon that could simplify REIT compliance and attract more foreign investment.
The IRS issued proposed regulations on Oct. 20, 2025, that withdraw the controversial “look-through” rule that complicated how REITs determined their qualification as “domestically controlled” under the Foreign Investment in Real Property Tax Act (FIRPTA). This change could simplify structuring, reduce uncertainty for fund managers, and provide foreign investors with clearer access to U.S. real estate.
In short, REITS will have less tracing, fewer barriers, and potentially greater flexibility for cross-border deals.
What Changed and Why It Matters
Under FIRPTA, foreign investors generally pay U.S. tax on the sale of shares in real estate investment trusts (REITs). However, there’s a key exception; when a REIT is “domestically controlled,” meaning less than 50% of its value is owned by foreign investors, those sales are not taxed under FIRPTA.
Previously, determining whether a REIT was domestically controlled involved tracing ownership through multiple levels of entities, including U.S. corporations owned by foreign investors. This “look-through” rule made compliance complicated and sometimes discouraged foreign investment.
The newly proposed regulations withdraw that requirement. Domestic C corporations would be considered U.S. persons, simplifying ownership calculations and reducing the administrative burden for REIT sponsors and investors alike.
A Simpler Path for Structuring and Compliance
This change could have significant implications for REITs that use “blocker” corporations or other layered ownership structures. If approved, the changes could make it easier for sponsors to identify domestic control and stay compliant under FIRPTA.
For example, a REIT with partial foreign ownership through a U.S. blocker corporation may now retain its domestically controlled status — something previously jeopardized under the 2024 regulations. That shift could make U.S. real estate more attractive to foreign investors and provide sponsors with greater flexibility in structuring cross-border deals.
The proposal would allow taxpayers to apply the rules retroactively to transactions occurring on or after April 25, 2024, if finalized.
What Real Estate Leaders Should Do Next
Take a proactive stance now to position your investments for possible changes.
- Review ownership structures for all REITs and investment vehicles to assess potential impacts.
- Assess planned transactions to understand how proposed changes might impact tax treatment and compliance.
- Revisit entity structures and investment strategies to enhance flexibility and efficiency.
- Prepare for possible regulatory updates and stay informed of changes before final rules are released.
- Collaborate with your real estate advisor to evaluate implications, discover opportunities, and ensure compliance.
Stay Ahead with Expert Guidance
The upcoming regulations may change how you raise and manage capital starting in 2026. Now is the time to review your REIT and partnership structures to ensure they align with changing tax rules and your long-term growth goals.
Connect with a CBIZ real estate advisor to discuss how these upcoming regulations might impact your investment strategy and help position your investments for lasting success.
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