Treasury, IRS Propose Removal of Look-Through Rule

Why the Look-Through Rule Matters in the First Place

To understand the proposal, start with the basic FIRPTA framework. Under Section 897, gain realized by a foreign person on the sale of a U.S. real property interest can be taxed in the United States. A qualified investment entity, or QIE, generally includes a REIT and certain RICs that are U.S. real property holding corporations. There is, however, a prized exception: stock in a domestically controlled qualified investment entity is not treated as a U.S. real property interest.

That exception is gold for foreign investors in U.S. real estate. If a REIT is domestically controlled, a foreign investor may be able to sell its REIT stock without triggering FIRPTA tax on the sale. That is why the question of who counts as a foreign owner, directly or indirectly, is not just academic. It can shape investment structures, exit strategies, withholding analysis, and whether a deal still makes sense after the tax modeling is done.

The statute says a QIE is domestically controlled if, during the relevant testing period, less than 50 percent of the value of its stock is held directly or indirectly by foreign persons. The entire fight has been about what “indirectly” means. And as anyone who has spent time around tax regulations knows, one adverb can ruin an otherwise pleasant afternoon.

What the 2024 Final Regulations Did

In 2024, Treasury and the IRS finalized regulations that addressed how to determine whether foreign persons indirectly hold stock in a QIE. The final rules kept a version of the domestic corporation look-through concept that had appeared in the 2022 proposed regulations, but narrowed it. Instead of looking through a domestic corporation when foreign persons owned at least 25 percent of it, the 2024 final regulations generally applied look-through treatment only when foreign persons owned more than 50 percent of a non-public domestic C corporation by value.

In practice, that meant a domestic corporation could stop being treated as a straightforward U.S. owner for the domestically controlled REIT test if it was itself foreign-controlled. Once the corporation was treated as a look-through person, advisers had to trace ownership up the chain and ask who really sat behind that blocker. If the answer was “mostly foreign persons,” the REIT could lose domestically controlled status.

Treasury also offered a 10-year transition rule for certain existing structures, which softened the blow for pre-existing REITs. Even so, the 2024 rule was widely criticized because it disrupted longstanding market practice. Before the 2024 final regulations, many taxpayers and advisers generally treated domestic C corporations as non-look-through persons for this purpose. That approach supported common U.S. blocker structures used in foreign investment into U.S. real estate.

The 2024 rule did not make these structures impossible, but it made them far harder to analyze and, in many cases, far less attractive. Suddenly, ownership testing could require multi-level tracing, access to information that sponsors did not always have, and assumptions that could become outdated as ownership shifted over time.

What Treasury and the IRS Proposed in 2025

The 2025 proposal changes course. Treasury and the IRS proposed removing the domestic corporation look-through rule and treating all domestic C corporations as non-look-through persons for purposes of determining whether a QIE is domestically controlled. In other words, if a domestic C corporation owns REIT stock, the corporation would count as a U.S. owner for this test, even if foreign investors own the corporation.

That is a big reversal. It effectively restores the more favorable pre-2024 planning landscape for many structures involving private REITs and U.S. blocker corporations. It also means the agencies stepped back from their earlier attempt to force a deeper ownership tracing exercise whenever a domestic corporation looked too foreign around the edges.

The proposal also includes conforming revisions to the existing regulations because once you remove the look-through rule, other pieces of the regulatory machinery need to be adjusted too. Treasury and the IRS further indicated that, once finalized, the regulations would apply to transactions occurring on or after October 20, 2025, and taxpayers could choose to apply the final regulations to transactions occurring on or after April 25, 2024. That retroactive option is not a footnote; it is one of the most practical features of the proposal.

As of March 2026, the proposal still appears to be just that: a proposal, not final law. So the champagne should remain corked for the moment, even if several deal teams have already started smiling again.

Why the Government Changed Its Mind

Treasury and the IRS did not pretend this shift happened in a vacuum. The preamble to the proposed regulations openly acknowledges the concerns raised after the 2024 final regulations were issued. Those concerns fell into two large buckets: practicality and statutory interpretation.

1. Practical difficulty

Taxpayers argued that tracing upstream ownership through domestic corporations was often messy, expensive, and sometimes unrealistic. Sponsors may not have reliable data about indirect investors. Ownership can change. Information may be held by fund administrators, feeder funds, or other parties with confidentiality constraints. That can create legal uncertainty and operational complexity, especially where the REIT needs confidence in its status over a multi-year testing period.

2. Statutory concerns

Commenters also argued that the look-through rule did not fit comfortably with the text and structure of Section 897(h). The domestically controlled QIE provision does not expressly include a broad corporate look-through rule, while other parts of Section 897 do contain specific look-through provisions in defined circumstances. That raised the classic statutory question: if Congress wrote explicit look-through rules elsewhere, was the absence of one here intentional?

3. Policy concerns

There was also a policy point hiding beneath the legal one. A domestic corporation is already subject to U.S. tax rules. So some commenters argued that treating that corporation as if it were transparent for this purpose overshot the goal and imposed friction without enough policy payoff. Treasury and the IRS ultimately signaled that they found these objections persuasive enough to reverse course.

What the Proposal Means for REITs, Foreign Investors, and U.S. Real Estate Deals

The proposal has immediate significance for anyone structuring or reviewing foreign investment in U.S. real estate through REITs.

REIT sponsors may get a simpler compliance path

If the look-through rule disappears, sponsors no longer need to chase as much upstream ownership data through domestic C corporations just to test domestic control. That reduces administrative burden, lowers the risk of errors, and makes internal tax reviews less like detective work and more like actual planning.

Foreign investors may regain a friendlier exit path

For foreign investors, the ability to invest through a domestic blocker without automatically contaminating domestically controlled status can make REIT structures more attractive. That does not eliminate all U.S. tax consequences, but it can improve the tax profile of an eventual stock sale at the investor level.

Old structures may deserve a second look

Taxpayers who reworked deals, delayed transactions, or concluded that a REIT failed the domestically controlled test under the 2024 rules may now want to revisit those conclusions. Because the proposal allows reliance before finalization and contemplates application back to April 25, 2024 once finalized, some past analyses could look very different under the proposed approach.

It may encourage more inbound real estate capital

One of the most important commercial effects is psychological as much as technical. The 2024 rule created uncertainty. Uncertainty slows deals. The proposed repeal signals a more administrable framework, which can reduce friction in foreign investment into U.S. real estate. Markets tend to like fewer moving targets, and investors generally prefer not to discover a surprise tax trap in footnote 14 of the memo.

A Simple Example of the Rule Change

Suppose a private REIT has two ownership blocks. First, foreign investors directly own 49 percent of the REIT. Second, a domestic C corporation owns the remaining 51 percent. That domestic corporation is itself 100 percent owned by foreign investors.

Under the 2024 final regulations, the domestic corporation could be treated as a look-through person because it is foreign-controlled. That means the foreign ownership behind the corporation would be traced through. The result could be 100 percent foreign ownership for the REIT, causing the REIT to fail the domestically controlled test.

Under the 2025 proposed regulations, the domestic corporation would be treated as a non-look-through person. The corporation would count as a U.S. owner for this specific test. Only the directly held 49 percent would count as foreign-owned, and the REIT could qualify as domestically controlled.

That does not mean the structure becomes tax-free fairy dust. The blocker corporation may still face regular U.S. corporate tax consequences on its own sale of REIT stock or other transactions. But for purposes of the domestically controlled REIT analysis, the proposal significantly changes the answer.

What the Proposal Does Not Change

This is where the confetti should stop for a moment. The proposal does not rewrite FIRPTA from scratch. It does not eliminate withholding rules generally. It does not change the definition of a U.S. real property holding corporation. It does not make every foreign investment in U.S. real estate magically exempt from tax. And it does not finalize itself just because the industry would like that very much.

What it changes is the ownership-testing approach for determining whether a QIE is domestically controlled. That is a big deal, but it is still one part of a broader FIRPTA and REIT compliance ecosystem. Taxpayers still need to evaluate entity classification, REIT qualification rules, transaction timing, withholding mechanics, and the corporate-level tax consequences that may remain even if investor-level FIRPTA exposure is reduced.

Why This Proposal Is Likely to Stay Important

The proposal matters beyond the narrow world of technical tax regulation because it reflects a broader regulatory lesson: administrability matters. Treasury and the IRS effectively acknowledged that a rule can be theoretically elegant and still fail in the real world if it requires ownership visibility that taxpayers do not actually have.

It also matters because it speaks to the long-running tension between anti-abuse concerns and practical commercial structuring. The government clearly worried in 2024 that foreign investors could use domestic blocker corporations to create “domestically controlled” REITs too easily. The 2025 proposal suggests the cure may have been more disruptive than the disease.

For real estate markets, that matters. Rules that increase uncertainty around exits can suppress investment appetite. Rules that are easier to administer, even if not beloved by every policy purist in the room, often produce more stable planning and fewer mid-deal panic calls. That is not glamorous, but it is how much of tax law actually earns its keep.

Practical Experiences Related to the Proposed Removal of the Look-Through Rule

One of the clearest real-world experiences tied to this topic is how much time and energy deal teams have spent trying to answer what sounds like a simple question: who really owns the REIT? Under the 2024 framework, that question often became a scavenger hunt. Tax directors, outside counsel, fund managers, investor relations teams, and administrators all ended up in the same awkward dance, trying to gather ownership data from multiple levels of holding entities. In theory, this is manageable. In practice, it can feel like trying to assemble a jigsaw puzzle after someone swapped half the pieces with another box.

Advisers in the market have described a familiar pattern. A structure looks acceptable at signing. Then someone notices a domestic blocker in the chain. Then another person asks whether that blocker is foreign-controlled. Then the requests start: ownership ledgers, side letters, feeder fund reports, confirmation from offshore vehicles, and updated capitalization data. A week later, everyone is still arguing about whether the relevant ownership percentage should be measured using value, how often the data needs refreshing, and whether the sponsor can rely on representations that may already be stale.

Another common experience has been caution bordering on paralysis. When rules are difficult to administer, the legal answer is not the only problem; the commercial response becomes more conservative. Some sponsors reportedly built extra tax buffers into transactions. Others reconsidered whether to use REIT structures at all. Some foreign investors became more hesitant about assuming they could achieve a clean exit through a domestically controlled REIT. In cross-border real estate, hesitation has a cost. It can change pricing, extend diligence timelines, and move capital elsewhere.

There is also the experience of mismatch between legal theory and operational reality. A sponsor may be expected to determine indirect foreign ownership over a multi-year testing period, but ownership in investment vehicles is not frozen in amber. Investors come in, redeem, reorganize, merge, or hold through intermediate entities with their own reporting limits. In that setting, a rule that depends on perfect visibility can produce a lot of estimated comfort and not nearly enough actual comfort.

The proposed removal of the look-through rule speaks directly to those lived market experiences. It recognizes that taxpayers were not merely complaining because they dislike paperwork, although nobody has ever opened a cap table and yelled “finally, entertainment.” They were saying the rule imposed costs, uncertainty, and data demands that could distort investment behavior. That is why the proposal has drawn attention well beyond technical tax circles. It is not just about doctrine. It is about whether the rules align with how deals are structured, how information is actually collected, and how businesses make decisions under pressure.

For many practitioners, the experience of the last two years has been a reminder that tax regulations do not live in a vacuum. They live in closing checklists, diligence calls, investor memos, and late-night emails asking whether 51 percent owned by a U.S. corporation still means what it used to mean. The 2025 proposal does not eliminate complexity from FIRPTA planning, but it does reduce one of the more frustrating sources of it. And in tax, reducing frustration is sometimes the closest thing available to a standing ovation.

Conclusion

The proposed removal of the domestic corporation look-through rule is a notable reversal by Treasury and the IRS, and one with meaningful consequences for domestically controlled REITs, qualified investment entities, and foreign investment in U.S. real estate. By treating domestic C corporations as non-look-through persons again, the proposal would simplify ownership testing, restore a more familiar planning framework, and potentially reopen structures that became harder to use after the 2024 final regulations.

At the same time, the proposal is not a full rewrite of FIRPTA, and it is not yet final. Taxpayers should read it as an important policy signal, a practical simplification, and a reminder that in tax law, “indirectly” can be the most expensive word in the room. For now, the takeaway is straightforward: Treasury and the IRS appear to have listened, and the market is paying close attention.

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