On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA), which both extends many soon-to-expire provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) and makes several additional changes to the Internal Revenue Code (the Code). This summary focuses on provisions in the OBBBA related to real estate investors, which are favorable overall.
Modification of Limitation on Business Interest Deduction and Coordination of Business Interest Limitation With Interest Capitalization Provisions
As enacted by the TCJA, section 163(j) of the Code generally limited a taxpayer's annual deduction for interest incurred in a trade or business to 30% of business earnings before interest, taxes, depreciation, and amortization (EBITDA) and reduced the limit to 30% of business earnings before interest and taxes (EBIT) for tax years beginning on or after January 1, 2022. Although an exception from this 30% limitation was provided for "electing real property trade[s] or business[es]," such an election also required use of the longer-life alternative depreciation system (aka ADS) with respect to the nonresidential, residential, and qualified improvement property used in such business.
The OBBBA restores and makes permanent the more taxpayer-favorable EBITDA limitation for taxable years beginning after December 31, 2024, while also preserving the electing real property trade or business exception. At the same time, however, the OBBBA requires that most capitalized interest be included in applying the business interest limitation in section 163(j) and the amount of the deduction allowed under the section 163(j) limitation be applied first to such capitalized interest.
Restoration of Limitation on Downward Attribution of Stock Ownership Under CFC Rules
Investing in US real estate through one or more domestic taxable corporations is a common structure for non-US investors. Frequently, such a "blocker" corporation is capitalized, in part, with loans from its shareholders. For many non-US investors, interest on such shareholder loans is subject to 30% US withholding tax unless the interest qualifies for the "portfolio interest exemption." Among other limitations, the portfolio interest exemption does not apply if the beneficial owner of the interest is treated as both (i) sufficiently closely held by US shareholders so as to be classified as a controlled foreign corporation (CFC) and (ii) related to the borrower (generally requiring a 50% affiliation by vote or value with the borrower). The TCJA modified the CFC rules in a manner that greatly expanded the scope of non-US companies that would be classified as CFCs, specifically by repealing section 958(b)(4) of the Code, which had not allowed attribution from a foreign person of ownership of a non-US company to its US affiliates (aka "downward attribution"). By allowing such downward attribution of stock ownership, this repeal in turn caused many non-US investors to be classified as CFCs, notwithstanding the absence of direct or indirect US ownership of the investor entity and, thus, lose the portfolio interest exemption on interest from their related blockers. The common tactic of limiting a non-US investor's blocker shares to nonvoting shares to satisfy other requirements of the portfolio interest exemption does not protect against this related CFC kick out. The OBBBA restores section 958(b)(4) as it existed prior to the TCJA for taxable years beginning after 2025 and, absent future regulations to the contrary, should facilitate inbound investing in US real estate by non-US investors previously at risk of being classified as CFCs through such downward attribution.
It should be noted, however, that the OBBBA authorizes the Secretary of the Treasury to issue regulations with respect to treating a newly defined "foreign controlled foreign corporation" (FCFC) as a CFC for portfolio interest purposes. An FCFC is a foreign corporation that is treated as a CFC for certain purposes when the definition of CFC is modified in certain respects, including to allow downward attribution. Thus, a future regulatory extension to include FCFCs as CFCs for portfolio interest purposes could undo the benefit of the repeal of section 958(b)(4) of the Code for many non-US investors relying upon such repeal to enjoy portfolio interest.
Extension and Enhancement of QBI Deduction
Section 199A of the Code allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) — subject, to certain limitations — plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. The QBI deduction was due to expire for tax years beginning after December 31, 2025. The OBBBA makes certain taxpayer-favorable adjustments to the limitations on the QBI deduction and makes the provision, as amended, permanent.
Modification and Extension of Limitation on Excess Business Losses of Noncorporate Taxpayers
The OBBBA makes the limitation on the deduction of excess business losses above certain thresholds for noncorporate taxpayers (previously due to expire for taxable years beginning on or after January 1, 2029) under section 461(l) of the Code permanent.
Permanent Expensing for Certain Business Property
As originally enacted as part of the TCJA, section 168(k) of the Code permitted a 100% deduction for the cost of certain depreciable property, including property that had a recovery period of 20 years or less and was placed in service prior to January 1, 2027 (or in some cases prior to January 1, 2028, if acquired pursuant to a binding contract entered into prior to such date). The OBBBA eliminated these placed-in-service date requirements and makes the 100% expensing allowed under section 168(k) of the Code permanent. Taxpayers using a cost segregation method of depreciation for real estate properties may benefit from the ability to expense portions of the cost of such properties by breaking down the properties' components, except for the buildings themselves, into assets that can be properly expensed.
Restoration of the TRS Test
The OBBBA restores the prior 25% limit for the value of a REIT's assets that may be represented by securities of one or more taxable REIT subsidiaries (TRSs), which had been reduced to 20% in 2018.
The Limitation on Individual Deductions for SALT
For tax years prior to 2030, the OBBBA increases the limitation on the individual state and local tax (SALT) deduction to $40,000 ($20,000 for a married individual filing a separate return), subject to phaseouts for higher-income taxpayers. Notably, however, the OBBBA does not contain a provision in the original House bill that would have eliminated the ability of many taxpayers doing business through partnerships or S corporations to use state so-called "pass-through entity" or "PTE" regimes to avoid the SALT deduction limit on such state taxes attributable to the taxpayer's business-related income.
Treatment of Payments From Partnerships to Partners for Property or Services
Since its enactment in 1984 — until the OBBBA — section 707(a)(2)(A) of the Code provided that, "[u]nder regulations prescribed by the Secretary," a partnership allocation and distribution to a partner could be subject to less favorable rules applicable to transactions between a partnership and a nonpartner if the allocation and distribution are related to the performance of services, or a transfer of property, by the partner and, when viewed together, are properly characterized as a transaction occurring between the partnership and a partner acting other than in their capacity as a member of the partnership. However, final regulations have never been issued under this provision. The OBBBA amends section 707(a)(2)(A) of the Code by replacing the language "[u]nder regulations prescribed by the Secretary" with "'except as provided' by the Secretary," applicable to services performed or property transferred after the date of enactment. Taxpayers who have structured arrangements (such as management fee waivers) in reliance on the position that prior section 707(a)(2)(A) of the Code was not "self-executing" in the absence of enabling regulations may want to revisit such arrangements.
Additional Notable OBBBA Provisions
- Permanent renewal and enhancement of qualified opportunity zones (QOZs): Several, generally favorable, changes are made to the provisions related to QOZs and the deferral of gain on investments in qualified opportunity funds, and the provisions are made permanent.
- Spaceports treated like airports under exempt facility bond rules: Section 142 of the Code is amended to qualify bonds issued for "spaceports" as exempt facility bonds.
- Permanent enhancement of low-income housing credit: The state allocation ceiling is increased by 12%, and the threshold is lowered to 25% for projects financed by bonds (and that are not subject to the state ceiling cap).
- Exception to percentage of completion method of accounting for certain residential construction contracts: Residential construction contracts are excluded from the requirement to use the percentage of completion method for both regular and alternative minimum tax purposes.
- Interest on loans secured by rural or agricultural property: 25% of interest received by a qualified lender (generally, a Federal Deposit Insurance Act–insured bank, state or federally regulated insurance company, or similar institution) on any "qualified real estate loan" made to a person other than a "specified foreign entity" will not be included in gross income.
- Treatment of capital gains from the sale of certain farmland property: Allows taxpayers to elect to pay tax on the gain from the sale of qualified farmland property to a qualified farmer on an installment basis over four taxable years, beginning with the tax year in which the sale occurs.
- Termination of energy efficient commercial building deduction: Elimination of the deduction allowed under current law for property whose construction begins after June 30, 2026.
- Termination of cost recovery for energy property and qualified clean energy facilities, property, and technology: Repeal of the special five-year recovery period that applies to certain energy investment credit property.
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.
