New FIRPTA Rules Reshape REIT Investor Status and Tax Strategies
The Treasury Department has finalized regulations, effective April 24, 2024, impacting the status of qualified investment entities (QIEs) under the Foreign Investment in Real Property Tax Act (FIRPTA). These changes, including the Blickdurch-Regelung, affect REITs and their non-U.S. investors, particularly those relying on domestic corporations as 'blockers'.
REITs and their non-U.S. investors must now consider investment strategies and ownership structures to maintain their domestically controlled QIE (DC QIE) status. Existing single-asset or limited-purpose REITs using domestic corporations as 'blockers' face less risk of losing DC QIE status than multi-asset private REITs operating on an open-ended fund model.
The final regulations introduce a 'look-through' rule, applicable to certain domestic Subchapter C corporations. This rule considers a 50% ownership threshold for determining DC QIE status. However, a transition rule exempts existing QIE structures from the new look-through rule for a decade, provided specific conditions are met.
The Treasury Department's final regulations, with retroactive application to transactions post-publication, have significant implications for REITs and their non-U.S. investors. While the names of affected REITs remain unspecified, these changes necessitate careful review and strategic planning to preserve DC QIE status.
