What are key tax changes in the One Big Beautiful Bill (OBBB) that may impact the Real Estate and Development industry?
Congress has officially passed legislation making several adjustments to existing tax policy, bringing with it a number of major benefits for the real estate industry, including:
- Qualified Business Income Deduction: The OBBB keeps the 20% deduction and makes it permanent, while easing phase-out thresholds and adding a new baseline $400 deduction for those with modest qualifying income. The new phase-out thresholds increased from $100,000 to $150,000 for MFJ and $50,000 to $75,000 for single filers.
- State and Local Tax (SALT) Deduction: The OBBB raises the cap to $40,000 for individuals and removes the cap entirely for pass-through entities, offering broader relief than the current $10,000 limit for individuals.
- Bonus Depreciation: The OBBB permanently restored to 100% for qualifying property placed in service after January 19, 2025, and an extension of manufacturing property receives similar treatment of 100% bonus if operational before 2031. Effectively, for 2025, before this change, a company with $500,000 of bonus eligible 5-year assets placed in service, would be able to deduct $260,000 as first-year depreciation ($200,000 of bonus and $60,000 on first year MACRS). Under the new law, on assets placed in service after January 19, 2025, the company would be able to take bonus on the full amount of $500,000, an additional $240,000 of depreciation deductions in 2025.
- Noteworthy as of the January 19, 2025 date, the understanding of a “written binding contract” is critical for determining applicable bonus depreciation percentage.
- Written Binding Contract: For property acquired in this manner, the acquisition date is the later of:
- Contract Date
- Date enforceable under state law
- Date all cancellation periods end
- Date all contingency clauses are satisfied
- Written Binding Contract: For property acquired in this manner, the acquisition date is the later of:
- Noteworthy as of the January 19, 2025 date, the understanding of a “written binding contract” is critical for determining applicable bonus depreciation percentage.
- Section 179 expense limits: The OBBB increased the maximum deduction to $2.5 million, with a higher phase-out threshold of $4.0 million, further supporting small and mid-sized businesses in acquiring and upgrading assets.
- Business Interest Deduction – Section 163(j): The OBBB reverts the business interest deduction calculation, which had been changed to EBIT in tax years 2022-2024, to an EBITDA basis, permanently. In capital-intensive businesses, the ability to add-back depreciation and amortization in the calculation is a huge benefit in reducing the large interest limitations some businesses may have previously had. This change is especially advantageous for real estate and infrastructure projects that rely heavily on debt financing, as it allows for greater deductibility of interest expenses and improves project feasibility and return on investment. However, for those who have made the Real Property Trade or Business election in years past, that is an irrevocable election, and so this change will not be impactful to those companies.
- Qualified Opportunity Zones: The OBBB revitalizes the Opportunity Zones (OZ) program by restructuring it to allow for rolling, 10-year designations starting in 2027, replacing the fixed-term approach. The OBBB continues the OZ designation process and enhances the eligibility requirements. These changes aim to provide more flexibility and predictability for investors, while ensuring that designated zones meet updated criteria for economic need. The enhancements are expected to attract sustained investment in underserved communities, driving long-term development and revitalization efforts. The OBBB provisions also maintain investor benefits with some modification.
- Deferral of Realized Gains – For investments made after December 31, 2026, the capital gain originally deferred as an eligible investment into a Qualified Opportunity Fund (QOF) must be included in income in the taxable year that is earlier of: 1) the date the QOF interest was sold or exchanged or 2) the date five years after the investment was made in the QOF. Realized gains invested prior to December 31, 2026 must still be recognized by December 31, 2026.
- Basis Adjustment – A taxpayer who holds their QOF investment, originally invested after December 31, 2026, for five years will be eligible for a 10% basis step-up, applied when the taxpayer is required to recognize the original deferred gain into income. This adjustment will be 30% for designated “Rural” zones.
- Gain Exclusion – A taxpayer can elect to have the fair market value (FMV) of their QOF interest equal to the basis on the date that the investment is sold or exchanged if sold before 30 years after the investment date. If sold after the 30-year mark, it would be the FMV of the investment as of the 30-year holding period date.
- Excess Business Loss Deduction: The OBBB made the Excess Business Loss (EBL) limitation permanent, while maintaining the current treatment of carryforward losses, allowing these to be treated as NOLs used in the following years of income, subject to traditional NOL rules, ensuring that businesses experiencing temporary downturns can still benefit from tax relief in future profitable years, enhancing financial stability.
- New Markets Tax Credit (NMTC): The OBBB permanently extends the NMTC, which was set to expire on Dec. 31, 2025. This benefit can continue to be considered in planning for financing and capital needs of future projects in eligible areas.
- Low-income housing tax credit (LIHTC): The OBBB permanently increases the allocation of low-income housing tax credits to states by 12% and lowers the threshold for bond-financing to 25% starting in 2026.
- Section 179D Energy-Efficient Commercial Buildings Deduction: The OBBB terminates the deduction for qualified property that begins construction after June 30, 2026.
- Section 45L Credit for Building Energy-Efficient Homes: The OBBB terminates the credit for homes either sold or leased after June 30, 2026. This termination will impact the economics of renewable energy projects and may require developers to reevaluate their financial metrics and models.
- Section 48E Wind and Solar Projects: The OBBB terminates the credit for Solar and Wind projects placed in service after December 31, 2027. However, if construction begins by July 4, 2026, the project does not need to be placed in service before December 31, 2027.
This article is part of our ongoing series on the potential impact of the One Big Beautiful Bill. You may view our full library on our OBBB Resource Center.
For more information on the impact of the OBBB on your company, please contact us at [email protected].
