Rather than waiting for clarity, industry leaders are shifting from a reactive to strategic approach—adjusting their financial models, planning timelines and investment strategies to remain competitive in a landscape full of variables. The firms that plan best and adapt to the climate are likely to gain an edge.
A year of economic crosswinds
With Q2 well underway, the real estate sector faces a uniquely complex economic landscape. Developers and investors are grappling with persistent inflation in construction costs, potential tariff adjustments on building materials, and the gradual expiration of key tax incentives that have long underpinned the industry's profitability.
Rather than waiting for clarity, industry leaders are shifting from a reactive to strategic approach—adjusting their financial models, planning timelines and investment strategies to remain competitive in a landscape full of variables. The firms that plan best and adapt to the climate are likely to gain an edge.
Tax policy outlook: navigating shifting terrain
While construction costs get the headlines, tax policy shifts could have an equal, if not greater, impact on real estate ROI over the next few years. The Tax Cuts and Jobs Act (TCJA), enacted in 2017, introduced a suite of benefits that transformed how firms approached capital investment, depreciation, and pass-through income. But many of these provisions are set to sunset by 2026 unless Congress acts—and others could change depending on the outcome of broader tax negotiations.
Key provisions in flux:
Bonus Depreciation: Bonus depreciation, governed by section 168(k) of the Internal Revenue Code (IRC), is currently at 40% in 2025, and dropping to 20% in 2026, before potentially disappearing in 2027. This is a significant change from the 100% expensing available just a few years ago. Efforts are underway in Congress to extend 100% bonus depreciation, though whether any extension would be temporary or permanent remains uncertain.
Qualified Business Income (QBI) Deduction: Section 199A of the IRC provides a 20% deduction for pass-through entities, including many real estate partnerships. Without Congressional action, this too will sunset by 2026. Lawmakers are considering proposals to extend this provision, but its future remains unresolved.
Estate Tax and Carried Interest: The federal estate tax exemption, currently at historically high levels, is scheduled to decrease significantly after 2025 unless legislative action is taken. In addition, there have been proposals to eliminate the favorable tax treatment of carried interest under Section 1061 of the IRC as part of broader deficit reduction efforts. While these changes have been discussed, no formal action has been taken to date.
Opportunity Zones: Set to expire on Dec. 31, 2026, these zones offer tax deferrals and exclusions for capital gains invested in underserved areas. The program has attracted billions of dollars in development and infrastructure projects. But with the 2026 expiration date looming, developers and investors are facing a shrinking window to initiate projects that qualify. Projects themselves do not need to be completed by 2026; rather, investors must establish and fund their qualified opportunity funds by that deadline. Initial bipartisan support existed for extending the program, but broader 2025 tax reform discussions have sidelined the issue for now. Additionally, investors should prepare for the required payment of deferred taxes on initial gains in 2027, when they file their 2026 returns—creating potential liquidity and cash flow challenges.
Interest Expense Limitations (Section 163(j)): This provision limits the deductibility of business interest expense to 30% of adjusted taxable income (ATI). While real estate firms may be eligible to opt out, doing so requires using longer depreciation schedules under the alternative depreciation system (ADS). While 163(j) itself is not scheduled to expire, potential changes are being discussed in Congress, particularly around how ATI is calculated. Some proposals suggest moving from earnings before interest and taxes (EBIT) to earnings before interest, taxes, depreciation, and amortization (EBITDA), which would generally allow higher interest deductions. However, the outlook for any changes remains unclear.
Navigating tax policy uncertainty: what developers should do now
In light of the potential tax policy changes, real estate firms should take proactive steps to preserve flexibility and protect margins. Acting early can make a meaningful difference in how projects perform under future tax conditions.
Developers should focus on locking in tax benefits while they remain available. Accelerating deductions through cost segregation studies and Section 179D energy incentives can help maximize near-term savings. Reassessing project timelines is also critical—investing now rather than later may yield better tax outcomes than deferring.
In addition, developers should monitor tax policy changes closely, as changes could impact entity selection for new projects and capital stack strategies. Existing joint venture agreements and partnership setups may also need to be reevaluated in light of expiring tax provisions and potential changes to key incentives.
For those considering opportunity zone investments, time is of the essence. Entry into the program ends on Dec. 31, 2026, and projects take time to qualify for full tax benefits.
Finally, make sure your tax advisor, attorney and finance team are working together. Planning across all areas will help you make the most of the current tax rules and position you to thrive in an uncertain environment.
Rising construction costs & tariffs: a tipping point?
From 2021 through early 2023, building material costs skyrocketed. With supply chains under strain and cheap capital fueling demand, prices went up fast.
Even though things have cooled a bit in 2024 and early 2025, costs are still much higher than they were before the pandemic. With higher interest rates baked into the market, developers are dealing with slower demand and no real signs that material prices will come back down anytime soon.
The possibility of new or reinstated tariffs adds another layer of uncertainty. Given the construction industry's reliance on imported materials (an estimated $14 billion worth of goods were imported for new residential construction—making up about 7% of all materials used for the sector), especially steel and aluminum, even modest trade policy changes could reintroduce volatility into project budgets.
Operational opportunities for developers
In today's market, smart developers aren't just tightening budgets—they're rethinking their entire operational strategy. Building flexibility into financial planning, project selection, and supply chain management now can help firms better manage rising costs, shifting trade policy, and future tax impacts.
Focus on Liquidity Management and Financial Planning and Analysis: Developers are enhancing financial planning and analysis (FP&A) processes to sharpen their forecast models, better predict cost scenarios and protect margins.
Review Supplier Exposure: Another area of focus is supplier management. High vendor concentration in tariff-vulnerable markets has emerged as a key risk. Diversifying suppliers and reevaluating procurement strategies is an advisable move.
Adjust Project Mix: Many developers are slowing new construction in favor of acquiring or upgrading existing properties that demand lower capital investment and offer faster returns. These moves aren't purely operational—they also carry important tax implications. Shifting from new builds to value-add projects affects how and when deductions like bonus depreciation and cost recovery are realized, making it essential for developers to consult with tax advisors when adjusting investment strategies.
Evaluate Market Entry: Expanding into regions with more affordable land, labor, and materials can help offset cost pressures, derisk portfolios and create new growth paths. Again, working with a tax advisor early in the process is critical, especially to understand state and local tax differences that could materially affect project returns.
Building resilience through strategic alignment
Real estate developers and investors are refocusing on the fundamentals of financial discipline. Many firms are sharpening their financial planning and analysis (FP&A) capabilities, updating models more frequently, tightening cost controls and embedding greater flexibility into how and when capital is deployed. These operational enhancements are critical, especially as market signals suggest a potential slowdown: new housing starts have declined, a classic early warning sign of broader real estate softening. In such an environment, firms that can pivot quickly will be far better positioned to weather shifting demand.
Financial discipline should also extend beyond cost management. Effective planning now requires a much closer alignment between tax and finance teams. Modeling after-tax returns, forecasting deferred tax liabilities, and optimizing cash flow assumptions under new rules are no longer optional. Changes to bonus depreciation, interest deductibility, and entity-level incentives will ripple across investment strategies. Tax planning isn't just an exercise of compliance anymore—it's a critical part of maximizing project viability and long-term returns.
Key Questions for 2025:
- Are we capturing all the tax benefits available to us—before they disappear?
- What's our downside scenario if material costs spike or incentive programs lapse?
- Do our current projects allow for adaptability in timing, phasing or scope?
Planning ahead in an uncertain market
As 2025 unfolds, one reality is clear: uncertainty isn't going away. Real estate developers and investors who build resilience and adaptability into their operations will have a clear edge over those waiting for perfect conditions.
While cost pressures, tariff risks, and shifting tax incentives all create complexity, they also create opportunity for firms that are proactive. Strengthening financial discipline, improving scenario planning, and integrating tax strategy into broader investment decisions will position firms to navigate whatever comes next.
In today's environment, preparation isn't just about defense—it's about staying on offense in a moving market.
James Wolcott is a principal with Kaufman Rossin, leading the firm's business consulting services (BCS) practice and mergers & acquisitions industry advisory group. He has provided consulting services to many of the world's leading organizations on issues of strategy, capital advisory and financial planning and analysis.
Robert Matt specializes in tax consulting, tax planning and tax compliance for real estate and construction companies and their owners.
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