Proposed Regulations Remove Look-Through Rule For Domestically Controlled REITs

I. Introduction

On October 20, 2025, the U.S. Department of the Treasury ("Treasury") and the Internal Revenue Service (the "IRS") issued proposed regulations (the "Proposed Regulations") that would helpfully revoke the current "look-through rule" for domestic C corporation shareholders to determine whether a "real estate investment trust" (a "REIT") is "domestically controlled". Accordingly, under the Proposed Regulations, a domestic C corporation shareholder is treated as a domestic person for purposes of determining whether a REIT is domestically controlled. Ownership interests in domestically controlled REITs are not treated as "United States real property interests" ("USRPIs")¹, and non-U.S. persons that sell interests in them are not subject to U.S. federal income tax on the gain. The Proposed Regulations permit taxpayers to rely on the Proposed Regulations before they are finalized and, if the Proposed Regulations are finalized as proposed, they would be