Whether you're the owner of a single-family residence or consider yourself a real estate investor, the recent passing of the One Big Beautiful Bill Act (OBBBA) could have an impact on taxes across the entire real estate industry.
How might OBBBA affect you? This will really depend on your unique situation and the deductions or credits you currently claim—but since many real estate tax provisions changed when OBBBA was signed into law, now is a good time to familiarize yourself with those changes and consider some adjustments to your own tax strategy.
Permanent Pass-Through Deductions
First, under Section 199A, OBBBA offers a permanent 20% pass-through deduction for real estate professionals who operate as partnerships, S corporations and LLCs. This change may affect structuring and income allocation decisions for investors and developers who are looking to minimize their tax burdens.
New Markets Tax Credit
As part of OBBBA, the New Markets Tax Credit (NMTC) is also being made permanent, which may give real estate investors and developers a little more confidence in tackling larger projects. Specifically, this federal tax credit offers incentives to investors who put money into certain low-income communities, with the credit totaling a maximum of 39% of the investment amount. This credit can be claimed over a seven-year period and covers a wide range of real estate investment projects, ranging from business expansions to residential communities.
Phaseout of Energy Tax Credits
Real estate owners should also be aware that under OBBBA, certain commercial energy tax credits under Section 179D and Section 45L will be phased out at an accelerated pace over the next year. This includes incentives under the Inflation Reduction Act. These will begin to phase out after June 30 of 2026, so now could be a good time to make eligible improvements to claim these credits before they're gone.
Renewed Business Interest Deduction Relief
With OBBBA being signed into law, investors and real estate developers may also benefit from a renewal of Section 163(j) business interest deduction. Under this deduction, which had been restricted for the 2022-2024 tax years, investors may be able to claim interest expense deductions, as well as depreciation and amortization. If you plan to claim this deduction moving forward, however, maintaining detailed documentation of all your interest expenses and relevant deductions is a must.
Restored 100% Bonus Depreciation
Under OBBBA, certain real estate businesses will also have the ability to accelerate deductions related to some expenses, including property improvements and equipment investments. In some cases, it may even be possible to claim these deductions immediately. The main thing to keep in mind when it comes to claiming this deduction is that the asset needs to be used for business purposes more than 50% of the time and cannot create a net loss for a business.
Qualified Opportunity Zone (QOZ) Programs
Under OBBBA, Qualified Opportunity Zones have also been made permanent, which could be a lucrative investment for developers and other real estate professionals. With the new law being passed, some changes have been made to QOZ that include:
- New zones being introduced in 10-year cycles
- Expanded reporting requirements for QOZ businesses
- Recognition of post-2026 investment gains after five years
What Else You Need to Know
Even though a lot may be changing in the real estate world with the passing of OBBBA, there's still a lot that will be staying the same. For example, pass-through entity taxes remain unchanged under Section 1031, and the controversial Retaliatory Tax under Section 899 was ultimately dropped before OBBBA was signed into law.
Time to Revisit Your Tax Strategy?
As you can see, there's a lot to keep in mind when it comes to your real estate investment decisions as you prepare for the changes to come under OBBBA. Perhaps most importantly, now is a good time for developers and investors to sit down and take inventory of their current credits, deductions, and exemptions claimed so they can assess how extensively these changes may affect them.
From there, it may be possible to make adjustments to tax strategies in order to make the most of these changes while minimizing taxes owed.
If you are looking for more guidance in understanding the impact of OBBBA on your real estate investments, please contact our tax department.