/>iOn Friday, July 4, 2025, President Trump signed into law the Reconciliation Bill commonly known as the One Big Beautiful Bill Act (OBBBA). Broadly speaking, the OBBBA extends and makes permanent many provisions enacted by the 2017 Tax Cuts and Jobs Act (TCJA) and amends other provisions of the Internal Revenue Code (IRC), including tax provisions that were part of the Inflation Reduction Act (IRA). The following is an overview of key tax measures enacted by the OBBBA that are likely to impact taxpayers in the real estate industry.
Bonus Depreciation
The OBBBA permanently reinstates 100 percent bonus depreciation for qualified property (e.g., certain machinery, equipment, and other short-lived assets) acquired on or after January 20, 2025. This provision allows businesses to immediately deduct (i.e., expense) the full cost of such qualified property in the year it is acquired, rather than depreciating such property’s cost over a period of years. TCJA had initially permitted 100 percent bonus depreciation for qualified property placed in service on or before December 31, 2022, with later placed in service property being subject to a phase-out. Following this change in law, cost segregation studies could be particularly valuable for taxpayers that have acquired property eligible for this benefit.
The OBBBA also creates a new elective 100 percent bonus depreciation for certain newly constructed “qualified production property” that is used in a “qualified production activity,” and satisfies certain other criteria. Notably, this benefit applies to eligible real property, but does not include any leased property. For this purpose, a “qualified production activity” is defined broadly to include manufacturing, production, or refining of tangible personal property, except for certain food and beverages. However, unlike bonus depreciation for qualified property described above, this tax benefit is temporary. In order to qualify, the construction of qualified production property must begin between January 20, 2025 and December 31, 2028, and be placed in service before January 1, 2031.
Business Interest Deduction
Following TCJA, the deduction for net business interest expense was limited under Section 163(j) of the IRC to 30 percent of the taxpayer’s “adjusted taxable income” (ATI). ATI was originally based on EBITDA for tax years beginning before January 1, 2025. For any later tax years, ATI was more stringently based on EBIT. The OBBBA permanently restores TCJA’s original, more taxpayer friendly, calculation based on EBITDA (rather than EBIT) for tax years beginning after December 31, 2024. By reverting to EBITDA, taxpayers would generally have a higher ATI and, therefore be able to deduct a larger amount of interest expense.
However, Subpart F income, GILTI inclusions, and Section 78 gross-up payments (potentially relevant for taxpayers with foreign activities) will be excluded from the calculation of ATI for tax years beginning after December 31, 2025.
The OBBBA also expands the scope of Section 163(j) to treat certain capitalized interest as business interest expense and now subject to the limitation.
Pass-Through Business Income Deduction
The OBBBA makes the 20 percent “qualified business income” (QBI) deduction under Section 199A permanent. Under the TCJA, Section 199A was set to expire for tax years beginning after December 31, 2025. The Section 199A deduction applies to S-corporations, partnerships, and other entities taxed as partnerships (e.g., multi-member LLCs), and qualified REIT dividends. The new itemized deduction threshold (described below) does not impact the determination of the deduction for QBI. A new provision also now provides for a $400 minimum deduction if the taxpayer has at least $1,000 of QBI from activities in which the taxpayer materially participates.
Finally, the OBBBA increases the limitation phase-in window from $50,000 for single filers ($100,000 for married filing jointly) to $75,000 for single filers ($150,000 for married filing jointly). As a result of the phase-in window, more taxpayers will be able to receive the full 20 percent QBI deduction. Taxpayers should check with their tax advisors and consider how the changes impact their eligibility for the deduction.
Qualified Opportunity Zones
The OBBBA makes major changes that extend, modify, and make permanent the “qualified opportunity zone” (QOZ) program.
The OBBBA authorizes governors to designate new QOZs on a rolling ten-year basis, with the first new designation on July 1, 2026. However, QOZ benefits will only be available for investments made on or after January 1, 2027 in the newly designated zones. The designation will be effective for ten years, and QOZ designations are redetermined on each ten-year anniversary following January 1, 2027.
For gain that is reinvested in a qualified opportunity fund (QOF) after December 31, 2026, the OBBBA allows a taxpayer to defer recognizing their pre-investment gain until the earlier of their exit from the QOF or five years after such investment. The taxpayer will also receive a ten percent basis step-up if the taxpayer holds the investment for at least five years from the investment date, effectively eliminating that portion of its historic taxable gain. However, the OBBBA eliminates an additional five percent basis step-up that applied at the seven-year mark. If a taxpayer holds its investment for at least ten years and then sells the investment within 30 years, the taxpayer will pay no tax on new gain from the investment in the QOF. The gain exclusion applies to both gain from investment appreciation and depreciation recapture that may arise during such holding period. Alternatively, if a taxpayer holds onto the investment for 30 years or more, it will receive a stepped-up tax basis equal to the investment’s fair market value determined as of the 30-year anniversary date, but any additional gain thereafter will be subject to tax when the taxpayer disposes of the investment.
The OBBBA also creates a new class of QOF called the “qualified rural opportunity fund” (QROF) to encourage QOZ investment in targeted rural areas. The incentive allows taxpayers a 30 percent basis step-up for investments in QROFs held for five years. The OBBBA lowers the substantial improvement threshold for improving existing structures in QROFs to 50 percent (down from 100 percent for regular QOZs).
In addition to these changes to the QOZ program, the OBBBA also introduces a new detailed reporting regime. These provisions are designed and intended to improve oversight and transparency regarding the economic impact of QOF investments, and noncompliance with these new reporting requirements may result in significant penalties.
Clean Energy Incentives
The OBBBA modifies and eliminates many tax benefits for clean energy, including certain tax credits provided by IRA. A full discussion of the clean energy related changes of the OBBBA is beyond the scope of this article and the summary below contains only a high-level discussion with respect to wind, solar, and energy storage projects.
Prior to the Act, qualifying wind and solar energy projects were eligible for investment tax credits (Section 48E) and production tax credits (Section 45Y), subject to phase-out either beginning in 2032 or, if later, the year the Treasury Secretary determines annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25 percent of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2022.
The OBBBA significantly restricts these tax credits for qualifying wind and solar projects. The credits are no longer available for such projects placed in service after December 31, 2027. There is an exception for facilities that begin construction before July 5, 2026, and those wind and solar projects will remain eligible, subject to current completion deadlines, which generally requires projects to be placed in service within four calendar years after the year in which construction begins.
Qualifying energy storage projects were also eligible for the investment tax credit under the IRA and subject to the same phase-out rules as for qualifying wind and solar projects. The OBBBA does not change the eligibility timeline for energy storage projects. However, qualifying energy storage projects are now subject to new rules limiting “material assistance” from prohibited foreign entities, but with stricter limits.
In general, the OBBBA enacts new limitations that generally apply to the Section 48E investment tax credit and Section 45Y production tax credit if the construction of an otherwise eligible project begins after December 31, 2025 and includes “material assistance” from a prohibited foreign entity. These rules restrict an otherwise eligible project’s ability to incorporate manufactured products or components from such foreign entities. A prohibited foreign entity generally includes (i) governments (and agencies and instrumentalities) of China, Iran, Russia, North Korea, (ii) citizens or nationals of any of those countries, (iii) entities having their principal place of business in those countries, and (iv) controlled entities and subsidiaries of any of the foregoing.
SALT Deduction Limit and Pass-Through Entity Tax Election Workarounds
The OBBBA raises the SALT cap to $40,000 for joint filers ($20,000 for married individuals filing separately) for tax years 2025 through 2029, after which, the limitation reverts to $10,000 ($5,000 for married individuals filing separately). For taxpayers with modified “adjusted gross income” over $500,000, there is a phase-down of the $40,000 deduction.
The OBBBA does not place any new limitations on pass-through entity taxes (PTET) and does not adopt limitations that were proposed in the House version of the bill. As a result, the availability of PTET deductions remains unchanged.
In California, pass-through entities — i.e., entities that are taxed as partnerships, — may annually elect to pay an entity level state tax on income. Qualified taxpayers receive a credit for their share of the entity level tax, reducing their California personal tax income. However, the PTET in California is set to expire January 1, 2026 unless action is taken to extend current law.
New York State and New York City, by contrast, have a permanent PTET election.
Taxable REIT Subsidiaries
The OBBBA increases the percentage of a REIT’s total assets that may be represented by securities of one or more “taxable REIT subsidiaries” (TRS) from 20 percent to 25 percent effective for taxable years beginning after December 31, 2025. TCJA reduced the limit from 25 percent to 20 percent, but OBBBA restores the pre-TCJA 25 percent limit.
Miscellaneous Itemized Deductions
The OBBBA makes permanent the suspension on deducting miscellaneous itemized expenses that was originally enacted under the TCJA. Under the TCJA, the suspension of miscellaneous itemized deductions was originally scheduled to expire for tax years beginning after December 31, 2025.
Carried Interest
The OBBBA does not make any changes to the federal income tax treatment of carried interest.
Capital Gains Rate
The OBBBA does not alter the current long-term capital gains rate (zero percent, 15 percent, and 20 percent).
Ordinary Income Rates and Limit on Itemized Deductions
The OBBA also does not alter the ordinary income tax rates and the highest marginal federal income tax rate for individuals remains 37 percent. However, the OBBBA does limit the benefit of itemized deductions to 35 percent for individual taxpayers in the top income bracket (meaning that for such taxpayers each dollar of itemized deductions can only reduce tax liability by no more than 35 cents).
Corporate SALT Limitations
The OBBBA does not adopt prior proposals to alter the corporate SALT deduction.
