On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) became law and will have a significant impact on the real estate industry in particular. Key areas include the preservation of full deductibility for business state and local taxes, permanent extension of the 20% deduction for pass-through business income and 100% bonus depreciation for qualifying assets, among others. The legislation also impacts Qualified Opportunity Zones, New Markets Tax Credits and Low-Income Housing Tax Credits, providing clarity and new opportunities for investors and developers.
Below takes a deeper look at key provisions for real estate industry participants.
The legislation preserves the full deductibility of business state and local taxes.
>> Our Take: During the reconciliation process, Congress contemplated everything from eliminating state and local tax deductions — which included real estate taxes — to only allowing 50%. Full deductibility was a win for the real estate industry. Taxpayers should ensure they are factoring in pass-through entity taxes (PTET) when exiting from properties and conducting year-end tax planning.
The legislation permanently extends the 20% qualified business income deduction (QBID), also known as Section 199A, for pass-through business income and REIT dividends. This provision also expands the deduction limit phase-in range by increasing the $50,000 (non-joint returns) and $100,000 (married filing joint returns) amounts to $75,000 and $150,000, respectively. The provision eases the impact of the limitations for both specified service trades or businesses (SSTBs) and those pass-through entities subject to the wage and investment limitation.
Additionally, this provision introduces a new, inflation-adjusted minimum deduction of $400 for taxpayers with at least $1,000 of qualified business income from one or more active trades or businesses in which the taxpayer materially participates. This ensures small business owners with a certain qualified business income level are entitled to an enhanced baseline deduction.
>> Our Take: This provision continues to provide some parity between the tax rates pass-through business owners are subject to (29.6%) and corporations (21%), which offers taxpayers more certainty regarding entity choice.
The OBBBA permanently extends 100% bonus depreciation for assets placed into service after January 19, 2025.
Importantly, the provision does not apply to property for which a written binding contract was entered into prior to January 20, 2025. For this property, the pre-OBBBA law bonus depreciation rates apply:
| Property Placed in Service Date (under written binding contract) | Bonus Depreciation Amount Allowed |
|---|---|
| 2025 | 40% |
| 2026 | 20% |
| 2027 | 0 |
>> Our Take: For property for which there is no written binding contract, this legislation permanently extends bonus depreciation at a rate of 100%, which effectively allows for immediate expensing of all fixed asset additions that currently qualify for bonus depreciation. Certainty around this issue will provide businesses with better clarity to plan for capital investments.
Taxpayers also must continue to be aware of potential state tax conformity issues with respect to bonus depreciation. From a planning perspective, taxpayers should consider setting their capitalization policy as high as possible to reduce state addbacks, since there will be very little risk on the federal side of expensing versus capitalizing and claiming 100% bonus depreciation.
The OBBBA provides the ability to expense 100% of qualified production property where construction, reconstruction or erection begins after January 19, 2025, and before January 1, 2029, and is placed in service after July 4, 2025, and before January 1, 2031.
Qualified production property is defined as nonresidential real property that is:
This provision also provides a special acquisition rule that allows a taxpayer to claim the qualified production property deduction for nonresidential real property that:
>> Our Take: This provision is not available for leased buildings. Only owner-occupied buildings would currently benefit. In addition, the written binding contract rule applies here as well and will determine whether a taxpayer meets the acquisition date requirement. Finally, the special acquisition rule is intended to allow used property to be considered qualified production property.
For tax years beginning after December 31, 2024, the legislation permanently extends the modified calculation of the business interest expense limitation to EBITDA (earnings before interest, taxes, depreciation and amortization) found in Sec. 163(j). Previously, amortization and depreciation could not be added back when applying the limitation.
>> Our Take: This provision moves the current calculation of the limitation from EBIT (earnings before interest and taxes) back to EBITDA, which will raise adjusted taxable income (ATI) for the purpose of calculating interest expense. As a result, additional interest expense is expected to be deductible. Taxpayers will need to carefully consider the impact of an ERPTB (Electing Real Property Trade or Business) election in 2024 and whether it makes sense to forgo an election and claim additional expense in 2025.
In addition, previous requirements and elections to capitalize interest have changed, as the limitation under 163(j) must now be computed before applying any capitalization provisions (other than mandatory interest capitalization provisions) beginning in tax years ending after December 31, 2025. Taxpayers using capitalization provisions to alter the 163(j) limitations will need to review this strategy and recalculate the allowable amount of interest expense under the new provisions of the OBBBA.
We expect Treasury will come out with guidance on how to revoke an ERPTB election previously made due to the change in tax law. Taxpayers will need to consider prior elections due to the rule changes.
The OBBBA permanently extends the disallowance of a deduction for excess business losses, indexes the $250,000 threshold for inflation, and retains the carryover of an excess business loss as a net operating loss (NOL).
>> Our Take: During the reconciliation process, a proposal was included that would have limited the ability to convert an excess business loss to an NOL. If that provision had become law, it would have severely limited the benefits of the 100% bonus depreciation and factory expensing provisions.
The new law increases the flexibility of Real Estate Investment Trusts (REITs) by raising the percentage of assets of a REIT that may be held in taxable REIT subsidiaries (TRS) from 20% to 25% in tax years beginning after December 31, 2025.
>> Our Take: While not a new concept, as the limit has fluctuated historically, this latest increase could ease compliance and support growth strategies. The increase of the TRS limit would also put REITs in line with similar limitations for registered investment companies (RICs). REITs and RICs have traditionally had somewhat comparable structures, and, historically, tax rules have been updated for a better match up of the benefits between the two structures. If historic trends continue, this proposed change may result in a favorable outcome for many REITs.
There is a new exception to the percentage of completion method of accounting for certain residential construction contracts and extends the construction contract period from two to three years.
>> Our Take: Prior law resulted in phantom income from the application of percentage of completion method for condominium developers. Taxpayers should consider making an accounting method change for tax purposes and the impact it will have on taxable income.
During the reconciliation process, Sec. 899 included provisions that could have increased tax withholding on foreign investors to 50%. This did not make its way into the final Act.
>> Our Take: This would have created a deterrent for foreign investors to invest in U.S. real estate. Many real estate trade associations, including the Real Estate Roundtable, NAIOP, ICSC and others, worked to inform members of Congress of this issue and it was removed from the final legislation.
The legislation establishes a permanent Qualified Opportunity Zone (QOZ) policy that builds off the original program. This provision creates rolling, 10-year QOZ designations beginning on January 1, 2027. The new law maintains the QOZ designation process from the Tax Cuts and Jobs Act (TCJA) and strengthens the eligibility requirements by:
The definition of "low-income community" is narrowed to census tracts that have a poverty rate of at least 20% or a median family income that does not exceed 70% of the area median income. Additionally, a guardrail is added to ensure the term low-income community does not include any census tract where the median family income is 125% or greater of the area median family income.
The provision preserves the three taxpayer benefits from the TCJA but modifies them as follows:
Additionally, the OBBBA provision establishes a new type of QOF that invests 90% of its assets in a QOZ comprised entirely of a rural area. Investment in these qualified rural opportunity funds (QROFs) will receive a 30% step-up in basis under the reduction benefit (as opposed to the general 10%). Additionally, a special rule lowers the substantial improvement threshold of existing structures from 100% to 50% in rural QOZs.
Lastly, the new law adds more reporting requirements moving forward for QOFs and QOZBs that will require them to provide the following information:
Penalties will be assessed for failure to comply with the reporting requirements. These penalties increase in amount if the fund meets the definition of a large QOF, which requires gross assets in excess of $10 million.
The first round of QOZs available under the new permanent policy will begin on January 1, 2027.
>> Our Take: The fact that this provision has made the QOZ program permanent will provide more certainty for fund managers, investors and other stakeholders that QOZs are here to stay. Rolling 10-year QOZ designations would begin January 1, 2027, and fewer non-rural census tracts are expected to qualify, since the definition of a low-income community is narrowed and contiguous census tracts that previously qualified solely based on their proximity to qualifying census tracts are no longer eligible.
The law included incentives to help drive additional investment to rural QOZs that generally had not seen as much capital infusion under the first round of the program.
Overall, the general tax benefits of the QOZ program remain intact. Taxpayers that experience a capital gain event should consult with their tax adviser on whether it makes sense for them to pursue reinvesting their capital gain into a QOF to take advantage of these benefits.
The legislation permanently extends the New Markets Tax Credits (NMTCs) that were scheduled to expire on December 31, 2025. Providing certainty in the NMTC program will allow all stakeholders to properly plan and execute deploying this subsidy into projects.
>> Our Take: Investors and other participants in the NMTC program have been lobbying for the program to be made permanent since inception in the early 2000s. Permanence would bring certainty to the market and make the credit more mainstream. Notably, the provision does not expand eligibility of taxpayers, since the credit is not AMT-eligible, and will still effectively require the leverage model for developers to obtain the maximum benefit of the credit from the existing investor base.
The legislation permanently increases the allocation of low-income housing tax credits to states by 12% and permanently lowers the bond-financing threshold to 25% for projects financed by bonds starting in 2026.
>> Our Take: This provision renews and refreshes the LIHTC program, which should help retain developer and investor interest in this financing opportunity.
The legislation scales back many of the incentives in the Inflation Reduction Act. However, the new law does preserve the incentives for certain projects, including:
>> Our Take: The marketplace for renewable energy projects will need to reset as a result of scaling back various incentives.
In addition to the real estate-specific provisions discussed, real estate owners, developers, fund managers and investors should be aware of impactful provisions to and planning opportunities for high-net-worth individuals including:
Read our related blogs:
>> "One Big Beautiful Bill Up Close: Tax Impact for High-Net-Worth Individuals"
>> "One Big Beautiful Bill Up Close: Tax Impact for Private Companies"
>> "One Big Beautiful Bill Up Close: Tax Impact for Private Equity and Registered Funds"
The OBBBA brings significant and lasting changes to the real estate industry, providing clarity and new opportunities for investors and developers. It will be imperative to work closely with your tax advisers to fully take advantage of the complex array of options.
Contact Dave Sobochan, Angel Rice or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.