OBBBA: Rental Property Tax Boost
Navigating the New Tax Landscape for Owners and Investors
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, profoundly impacts rental property owners by introducing a series of advantageous tax changes designed to enhance cash flow, reduce tax liabilities, and stimulate real estate investment. These provisions, which include the permanent reinstatement of bonus depreciation, favorable adjustments to interest expense limitations, and the extension of the Qualified Business Income (QBI) deduction, are set to reshape the financial landscape for anyone holding rental properties. Understanding these shifts is crucial for optimizing investment strategies and maximizing returns.
Permanent 100% Bonus Depreciation for Rental Property Assets
One of the most significant changes for rental property owners in the One Big Beautiful Bill Act” (OBBBA) is the permanent restoration of 100% bonus depreciation for qualified improvements and related assets. This means that for eligible property placed in service on or after January 19, 2025, owners can immediately deduct the full cost of new and qualifying used tangible personal property, such as appliances, furniture, and landscaping, as well as Qualified Improvement Property (QIP) like interior renovations to nonresidential buildings. This immediate expensing offers a powerful tool to reduce taxable income significantly in the year of acquisition, freeing up capital that can be reinvested into additional properties or used to improve existing ones.
Favorable Business Interest Deduction Changes
For rental property owners, especially those with highly leveraged investments, the OBBBA’s modification to the business interest deduction limitation is a welcome change. The law reverts to calculating adjusted taxable income (ATI) for the 30% business interest deduction cap using an EBITDA-based approach (Earnings Before Interest, Taxes, Depreciation, and Amortization) for tax years beginning after December 31, 2024. This reverses the prior EBIT-based limitation which had excluded depreciation and amortization from the ATI calculation. By including these non-cash expenses, rental property owners with substantial depreciation will find themselves with a higher ATI, enabling them to deduct a larger portion of their business interest expense. This can notably reduce the effective cost of debt and improve the profitability of leveraged rental portfolios.
Permanent Extension of the Qualified Business Income (QBI) Deduction
The OBBBA permanently extends the Qualified Business Income (QBI) deduction, providing long-term certainty for individual rental property owners and those operating through pass-through entities (e.g., LLCs, S-corps, partnerships). This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income, effectively lowering their taxable income. Prior to the OBBBA, this deduction was set to expire, creating uncertainty. Its permanent status ensures that rental income generated through qualifying activities continues to benefit from this substantial tax reduction, making passive real estate investment through pass-through structures even more appealing. The OBBBA also adjusts the phase-in income limits for certain types of businesses, broadening the reach of this benefit.
“This immediate expensing offers a powerful tool to reduce taxable income significantly in the year of acquisition, freeing up capital that can be reinvested into additional properties or used to improve existing ones.”
Renewed and Expanded Opportunity Zones
The OBBBA also significantly renews and expands the Opportunity Zones program, which offers long-term capital gains benefits for investments in designated rental property areas. The program is now permanent, with a new decennial redesignation cycle for zones beginning on July 1, 2026, and new zones going into effect January 1, 2027. While some eligibility criteria have been refined, this extended and refined program aims to attract substantial new capital into economically distressed communities. For rental property owners, this presents a unique opportunity to defer and potentially eliminate capital gains taxes on investments in qualified rental properties located within these zones, particularly for those held for extended periods.
Impact on Energy-Efficient Property Deductions and Credits
Rental property owners considering energy-efficient upgrades should be aware that the OBBBA may impact certain energy-efficient property deductions and credits, with some provisions undergoing changes or accelerated termination dates. For instance, the Section 179D deduction for energy-efficient commercial buildings will expire for properties beginning construction after June 30, 2026. Similarly, the Section 25C Energy Efficient Home Improvement Credit will expire for property placed in service after December 31, 2025, and the Section 45L New Energy Efficient Home Credit terminates for homes acquired after June 30, 2026. Rental property owners planning such improvements should review the specific timelines and consult with a tax professional to ensure eligibility for any remaining or modified incentives.
Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual business needs.
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Matt’s background in federal, state, and local tax enables him to provide extensive services to the firm’s clients in the areas of tax compliance and consulting across a spectrum of industries.