What is the domestically-controlled REIT exception under FIRPTA?

Domestically-controlled REIT mechanics and the 2024 look-through guidance

FIRPTA, REIT, and treaty mechanics are highly fact-specific and change with new IRS guidance. This page is sponsor-POV process commentary, not tax or legal advice. Engage U.S. tax counsel and the foreign investor's home-country tax advisor before structuring any cross-border CRE transaction.

Statutory basis: §897(h)(2) provides that stock in a domestically-controlled qualified investment entity (a REIT or a regulated investment company) is not a U.S. Real Property Interest. A foreign investor's sale of such stock therefore is not a sale of a USRPI and does not trigger FIRPTA withholding.

Domestically-controlled definition: the REIT is domestically controlled if less than 50% of the REIT's stock value (by value, not by vote) is held directly or indirectly by foreign persons at all times during the 5-year period ending on the date of the disposition (or shorter period if the REIT has not existed for 5 years).

Look-through guidance: in recent regulatory guidance, the IRS clarified that ownership through certain non-public U.S. corporations is looked through to determine the ultimate foreign or U.S. character. A U.S. C-corporation holding REIT stock that is itself foreign-owned (above defined thresholds) may not provide the U.S.-character it once did under prior interpretive practice. Confirm current rules with tax counsel, guidance has evolved.

Planning implication: sponsors structuring REITs intended to be domestically controlled cannot rely solely on a U.S. C-corp owner of the REIT stock to provide U.S. character if that C-corp is itself foreign-owned. Anchor U.S. investors (true U.S. persons or qualifying U.S. funds) need to hold the majority of REIT value directly or through clean U.S.-character ownership chains.

Practical sponsor playbook: at REIT formation and through every secondary or follow-on raise, confirm the U.S. ownership percentage by value. Document the ownership records in case of IRS examination at the time of a foreign investor's eventual exit. Update the analysis whenever ownership shifts materially (recap, secondary, additional foreign capital).

Combined with treaty planning: domestically-controlled REIT status is the foundational exit protection; treaty planning addresses ongoing dividend withholding through the hold period. Both layers are typical for institutional-quality cross-border CRE structures.