How will the One Big Beautiful Bill Act Impact the Real Estate Industry?

The One Big Beautiful Bill Act (OBBBA), enacted into law on July 4, 2025, includes numerous tax provisions affecting U.S. businesses. Specifically, these tax law changes are likely to significantly impact the business plans and tax liabilities of real estate companies and their stakeholders. Below are key provisions in the OBBBA that real estate professionals should consider.

Qualified Business Income Deduction

The Tax Cuts and Jobs Act (TCJA) created the qualified business income (QBI) deduction, which allowed certain noncorporate taxpayers to deduct up to 20% of their QBI and ordinary REIT dividends. Previously slated to expire after 2025, the deduction is now permanent under the OBBBA.

The new law includes a few enhancements for real estate owners, including greater clarity on what constitutes as a qualifying “rental trade or business” and increased income thresholds for wage or capital limitations. These changes allow more taxpayers to claim the QBI deduction, potentially reducing the highest marginal tax rate on qualified real estate income from 37% to 29.6%.

Bonus Depreciation and Section 179 Deduction

The OBBBA brings back and makes permanent the 100% first-year bonus depreciation. Bonus depreciation applies to the cost of qualified new and used assets acquired and placed into service after January 19, 2025. Under the TCJA, bonus depreciation would have been limited to 40% in 2025, reduced to 20% in 2026 and eliminated in 2027.

A new provision allows 100% bonus depreciation for qualified production property (QPP), which was not previously eligible. QPP refers to non-residential real property primarily used by the taxpayer as an integral part of a qualified production activity, such as manufacturing, production or refinement of tangible personal property. This provision was enacted to incentivize investments in long-term capital assets that facilitate increased domestic production.

The law also raises the Section 179 limit for the immediate deduction of specific qualified tangible personal property, computer software and certain improvements to non-residential buildings. For tax years starting in 2025, the maximum deduction increases to $2.5 million, with phaseouts beginning when qualifying purchases exceed $4 million. These thresholds will be adjusted for inflation annually starting in 2026.

Qualified Opportunity Zones

The TCJA established the qualified opportunity zone (QOZ) program to promote investment in distressed and low-income areas through capital gain deferral and tax exclusion on the appreciation in the value of the taxpayer’s investment in the Qualified Opportunity Zone Fund (QOF).  The OBBBA creates a permanent QOZ policy, often referred to as “Opportunity Zone 2.0,” which expands and refines the rules of the original program.

This new program retains the existing benefits of capital gain deferral, basis step-up and elimination of tax on appreciation of QOF assets. However, the deferral schedule has changes: rather than expiring on a fixed date of December 31, 2026, gains from investing in a QOF can now be deferred for five years from the date of QOF investment, unless the investment is sold or exchanged before the end of those five years.

The original rules under TCJA provided a basis step-up for the capital gains reinvested in a QOF based on the number of years the investment was held. The OBBBA retains the 5-year 10% basis step-up; however, it eliminates the 7-year additional 5% basis step-up. The new program also offers additional requirements and incentives for development in rural areas.

Eligible opportunity zones certified by state governors under the new QOZ program take effect on January 1, 2027, and are expected to be remapped every 10 years.

Existing QOF investments will retain the same deferral and exclusion benefits, and none of the rules enacted through the OBBBA will be applied retroactively.

Taxpayers currently invested in a QOF under the initial program should evaluate tax reduction opportunities to limit the tax impact of the deferred gains required to be recognized in taxable income on December 31, 2026. Options may include harvesting capital losses, cash flow planning and charitable donations of appreciated property.

Business Interest Limitation

The TCJA introduced the business interest expense limitation, which broadened applicability to all businesses, including real estate companies. The deduction for interest expense is generally limited to 30% of adjusted taxable income (ATI) for the year. For tax years beginning after December 31, 2021, the TCJA eliminated the add-back for depreciation, amortization and depletion from the computation of ATI, reducing the amount of interest a business could deduct annually. The OBBBA permanently reinstates the addback for depreciation, amortization and depletion for tax years beginning after December 31, 2025.

Under the TCJA, a real property trade or business (RPTB) could make a permanent election to be exempt from the business interest limitations described above. Real estate companies that have not made the RPTB election should consider whether it may now be beneficial.

Taxable REIT Subsidiary (“TRS”) Asset Test Limit Increase

Effective for tax years beginning after December 31, 2025, the OBBBA restores the TRS asset threshold to 25% (previously set at 20% by the TCJA). This allows the REIT to achieve more operational flexibility and vertical integration through property management, hospitality and other services, without violating REIT qualification tests.

Energy Efficient Incentives

One major hit to real estate companies is the accelerated expiration of certain energy efficiency credits, largely enacted and extended through the Inflation Reduction Act (IRA). Real estate companies looking to benefit from these lucrative credits must commence construction by June 30, 2026.

The New Energy Efficient Home Credit, Section 45L, was previously extended under the Inflation Reduction Act until December 31, 2032, providing a tax credit to builders who made energy-efficient improvements to single and multi-family homes. Under the OBBBA, this credit expires on June 30, 2026.

The Energy Efficient Commercial Buildings Tax Deduction, Section 179D, will also expire on June 30, 2026. This deduction currently provides tax benefits to commercial building owners who make energy-efficient upgrades resulting in at least a 25% reduction in energy consumption.

What’s next?

The OBBBA introduces major and permanent changes to federal tax law. These updates present significant opportunities, as well as complex challenges, for real estate businesses of all sizes.  Contact us to help you take full advantage of the new, or newly permanent, tax breaks.