On July 4, 2025, President Trump signed the "One Big Beautiful Bill Act" (the "OBBB") into law. The OBBB introduced several amendments to the Internal Revenue Code, including extensions and amendments to the tax provisions introduced by the 2017 Tax Cuts and Jobs Act ("TCJA"). Below is a summary of some of the tax changes in the OBBB that we expect to have an impact on the real estate industry.
Deduction for Qualified Business Income
Under the TCJA, noncorporate taxpayers with pass-through business income were allowed to deduct an amount from their taxable income equal to the lesser of: (i) 20% of qualified business income ("QBI") earned in a qualified trade or business, plus 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income; or (ii) 20% of the taxpayer's taxable income less net capital gain. However, the deduction was available only for taxable years beginning in 2018 through 2025.
This deduction has been made permanent. Additionally, the OBBB increases the deduction limit phase-in range from $50,000 (single filers) and $100,000 (joint returns) to $75,000 and $150,000, respectively.
The OBBB also includes a new minimum deduction of $400 for taxpayers who have at least $1,000 of QBI from one or more active trades or businesses in which the taxpayer materially participates.
Qualified Opportunity Zones
The TCJA introduced the Qualified Opportunity Zone program which was set to expire on December 31, 2026. This program has been extended indefinitely with some key tax changes:
- Investors will be able to continue to defer the recognition of capital gain by investing such gain in a Qualified Opportunity Fund. Investors can now defer recognizing such gain until the earlier of (i) the date the investor disposes of its interest in the QOF, or (ii) the fifth anniversary of the investment date.
- Additionally, an investor will automatically receive a 10% increase in its investment basis on the fifth anniversary of the investment date, thereby reducing the amount of gain required to be recognized on such date. Investors investing in a Qualified Rural Opportunity Fund will receive a 30% increase in their investment basis on the fifth anniversary of the investment date. A Qualified Rural Opportunity Fund is one that invests primarily in "rural areas" which is defined as any area other than (1) a city or town with a population of greater than 50,000, and (2) an urbanized area adjacent to a city or town with a population in excess of 50,000.
- If an investor holds its interest in the QOF for at least 10 years, but not more than 30 years, the basis of such investment will be increased to fair market value on date the investment is sold or exchanged. Therefore, no additional gain will be recognized by the investor when it disposes of its interest in the QOF (other than the gain recognized in year 5).
- If an investor holds its QOF investment for 30 years or more, the basis of such investment will be increased to the fair market value as of the 30th anniversary of the investment on date the investment is sold or exchanged.
Low Income Housing Tax Credits
The OBBB includes a significant boost to the so-called 4% low-income housing tax credit ("LIHTC"). Under prior law, if 50% or more of the aggregate basis of a qualified affordable-restricted residential rental building and the land on which the building is located was financed by the proceeds of certain volume cap-restricted private activity tax-exempt bonds ("PABs"), 4% LIHTCs are allowable with respect to the entire eligible basis of the project without a LIHTC allocation from the state LIHTC agency. The OBBB permanently reduces the bond-financing threshold to 25%, for projects financed by bonds starting in 2026. The "freed up" PAB volume cap can now be used to develop more 4% LIHTC projects, particularly in states where PAB and 4% LIHTC demand exceeded supply under prior law.
The OBB also provides a non-expiring increase in so-called 9% LIHTCs under Section 42 of the Internal Revenue Code, beginning in 2026. Going forward, states will now have 12% more 9% LIHTCs to award to qualified projects on an annual basis, thus boosting the amount of housing that can be developed under the 9% LIHTC program.
Energy Credits
The OBBB Eliminates the Energy Efficient Commercial Buildings Deduction (Internal Revenue Code Section 179D), and the New Energy Efficient Home Credit (Internal Revenue Code Section 45L) after June 30, 2026.
100% Bonus Depreciation
The OBBB permanently reinstates 100% bonus depreciation that was temporarily available under the TCJA. The bonus depreciation is available for qualifying tangible property acquired and placed in service after January 19, 2025.
100% Depreciation Deduction for Qualified Production Property
The OBBB introduced a new depreciation deduction for qualified production property. Qualified production property is defined to include any nonresidential real property used as an integral part of qualified manufacturing, agricultural or chemical production, or refining of a "qualified product" that results in a substantial transformation of the product. However, the statute excludes nonresidential real property used for functions unrelated to manufacturing, production, or refining of qualified products.
In order to qualify for the deduction, the qualified production property must be placed in service after July 4, 2025, but before Jan. 1, 2031, and the construction of which must begin after Jan. 19, 2025, but before Jan. 1, 2029.
State and Local Tax Deduction Cap
One of the most contentious tax provisions to come out of the TCJA was the temporary $10,000 limitation on the deductibility of state and local taxes. The limitation was set to expire on December 31, 2025.
The OBBB makes the limitation on the deductibility of state and local tax permanent, but does provide for a temporary increase of the $10,000 cap. The cap is increased to $40,000 for 2025 and continues to increase 1% each year from 2026 through 2029, before returning back to $10,000 in 2030.
The increased deduction amount begins to phase out for taxpayers with modified adjusted gross incomes exceeding $500,000 for 2025 (this amount is reduced to $250,000 for married taxpayers filing separately). The phase out reduces the $40,000 cap by 30% of the excess of the taxpayer's modified adjusted gross income over the $500,000 (or $250,000) threshold. However, the phase out cannot reduce the cap below $10,000.
Note, the passthrough entity tax deduction that has been used by passthrough entities in many states to avoid the SALT cap was not addressed in the OBBB. Earlier versions of the bill attempted to curtail the use of the passthrough entity tax deduction for certain taxpayers, but this was not included in the final version of the OBBB.
Carried Interest and 1031 Exchanges
In addition to the many tax changes included in the OBBB, some tax provisions important to the real estate industry were notably absent. In particular, the OBBB did not provide for any changes or modifications to the existing rules on the taxation of carried interest on 1031 like-kind exchanges. While the administration had discussed the possibility of modifying the rules related to carried interests, no changes were included in the final version of the OBBB.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
