IPA Advocacy Shapes Final Regulations on Domestically Controlled REITs

On April 24, 2024, the U.S. Department of Treasury and Internal Revenue Service published final regulations relating to the determination of whether a real estate investment trust (REIT) is ‘domestically controlled’ under Section 897(h)(4)(B) of the Internal Revenue Code of 1986, as amended (Final Regulations).

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On December 29, 2022, the IRS issued proposed regulations concerning domestically controlled REIT status, introducing a new C-corporation look-through rule. Many IPA members voiced concerns that this look-through rule could negatively impact foreign investor capital raise. The proposed regulations lacked transition provisions for existing investments and risked having an unintended retroactive effect.

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“We advocated for relief for existing investments to prevent a fire sale and to protect values in the real estate market,” said Anya Coverman, IPA President & CEO. “Our successful advocacy efforts ultimately led to Final Regulations that now include a ten-year transition rule. This rule exempts existing structures from the domestic C-corporation look-through requirement for a ten-year period, provided certain ownership and acquisition criteria are met.”

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IPA believes this transition rule will offer significant relief for many of our members. In partnership with DLA Piper, please see here for additional insights on the new regulation, as well as additional key takeaways below:

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• No Repeal of the Domestic C-Corporation Look-Through Rule

The IRS decided to keep the domestic C-corporation look-through rule, dismissing taxpayers’ calls for its repeal and sticking with their belief that it aligns with the tax policy for domestically controlled REITs.

• Increased Look-Through Threshold from 25% to 50%

The IRS raised the look-through threshold for non-public domestic C-corporations from 25% to 50%, which helps with REIT compliance but doesn’t make much difference for real estate funds and joint ventures.

• New Transition Rule

To prevent unintended retroactive effects, the IRS introduced a ten-year transition rule exempting existing REIT structures from the domestic C-corporation look-through rule, provided there are no major changes in ownership or significant new real estate acquisitions. However, this exemption might not benefit real estate funds and JVs that are still expanding.

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