Skip to content

Foreign Investment in REITs Subject to New IRS Regulations

May 31, 2024

The IRS recently finalized regulations (TD 9992) that stand to significantly affect foreign investment in real estate investment trusts (REITs) structured to qualify as “domestically-controlled” REITs (D-REITs). D-REITs have long been a popular investment vehicle for foreign persons due to various tax benefits. Namely, certain foreign persons can avoid filing a U.S. tax return or paying capital gains taxes under FIRPTA rules when selling stock in a D-REIT.

To qualify as a D-REIT, a majority of a REIT’s stock must be held (directly or indirectly) by U.S. persons (including business entities). Prior to the new IRS regulations, foreign investors did not affect the calculation of the D-REIT qualification threshold if such foreign investment was made through a U.S. C-corporation that owned stock in the D-REIT. IRS guidance from 2009 held that C-corporations will be treated as domestic holders of REIT stock for purposes of D-REIT qualification (PLR 200923001).

With exceptions, the new regulations generally allow the IRS to “look through” U.S. C-corporations and determine whether the corporations’ shareholders are foreign persons. If more than 50% of a U.S. C-corporation’s shareholders are foreign persons, the C-corporation will not qualify as a U.S. person for purposes of D-REIT qualification.  Accordingly, many REITS that have relied on the previous guidance may stand to lose D-REIT status under the new IRS regulations.

Luckily for foreign D-REIT investors, the new regulations provide a 10-year transition period for existing D-REITs to come into compliance. Provided such existing D-REITs do not trigger an early expiration of the transition period through certain new acquisitions, new foreign investment, or other pitfalls provided in the new regulations, U.S. C-corporations will continue to be treated as U.S. persons, despite a majority interest being held by foreign shareholders, until 2034.

Varnum’s Tax and Real Estate teams are available to assist and answer any questions about the new IRS regulations.

Sign up to be the first to access our leading legal insights.

The link you have selected will redirect you to a third-party website located on another server. We are offering the link for your convenience. Varnum has no responsibility for any external websites and makes no express or implied warranties about any external websites.

Please be aware that contacting us via e-mail does not create an attorney-client relationship between you and the firm. Do not send confidential information to the firm until you have spoken with one of our attorneys and receive authorization to send such materials.