IRS Relaxes Rules For Domestically Controlled REITs

Non-U.S. investors are generally subject to U.S. federal income tax on gains from investments in private U.S. real estate investment trusts (REITs). Two exceptions (among others) are for investments in "domestically controlled" REITs and for investors that are "qualified foreign pension funds." A domestically controlled REIT is one that is more than 50% owned by U.S. persons, which, until the proposed regulations described below were issued, included any U.S. corporation—even one that was 100% owned by non-U.S. persons.

In a prior bulletin, we described proposed regulations that targeted commonly used structures with a REIT that qualified as domestically controlled because it was 51% owned by a U.S. corporation (which in turn may be 100% owned by non-U.S. investors); thus the remaining 49% of the REIT was permitted to be owned by non-U.S. investors generally free of U.S. tax under the Foreign Investment in Real Property Tax Act (FIRPTA)¹. The proposed regulations