OBBBA’s Real Estate Edge
Unlocking New Opportunities for Property Firms Through Tax Reform
The One Big Beautiful Bill Act (OBBBA) significantly impacts real estate firms by offering a powerful suite of tax benefits designed to spur investment, development, and enhanced cash flow. These changes, ranging from accelerated depreciation to favorable interest deduction rules and the permanent extension of the Qualified Business Income (QBI) deduction, aim to create a more attractive environment for real estate professionals and investors. Understanding these provisions is essential for optimizing tax strategies and capitalizing on new opportunities within the market.
Permanent 100% Bonus Depreciation Restored
One of the most immediate and impactful changes for real estate firms under the OBBBA is the permanent reinstatement of 100% bonus depreciation for qualified real estate improvements and equipment. This means that for eligible assets placed in service on or after January 19, 2025, firms can immediately deduct the full cost in the year of acquisition. This applies to tangible personal property with a recovery period of 20 years or less, as well as Qualified Improvement Property (QIP), which includes interior improvements to nonresidential real property. This immediate expensing dramatically improves cash flow and reduces taxable income, freeing up capital for further acquisitions, renovations, or debt reduction.
New Deduction for Qualified Production Property
The OBBBA introduces a new, temporary 100% deduction for “Qualified Production Property” (QPP). While primarily targeting manufacturing, this provision can be highly relevant for real estate firms involved in developing industrial properties. QPP is defined as nonresidential real property used as an integral part of a qualified production activity (e.g., manufacturing, refining). To qualify, construction must begin after January 19, 2025, and before January 1, 2029, with the property needing to be placed in service before January 1, 2031. This offers an unprecedented opportunity for real estate developers specializing in industrial or production facilities to immediately expense the full cost of such new constructions.
“This immediate expensing dramatically improves cash flow and reduces taxable income, freeing up capital for further acquisitions, renovations, or debt reduction.”
Favorable Changes to Business Interest Deduction
For real estate firms, which often rely on substantial debt financing, the OBBBA’s modification to the business interest deduction limitation is particularly favorable. 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 change reverses the prior EBIT-based limitation that had excluded depreciation and amortization from the ATI calculation. By allowing these non-cash expenses to be added back, real estate firms with significant depreciation will find a higher ATI, enabling them to deduct more of their business interest expense and thereby improving their financial flexibility.
Permanent Extension of Qualified Business Income (QBI) Deduction
The OBBBA permanently extends the Qualified Business Income (QBI) deduction, providing long-term certainty for real estate professionals and investors who operate through pass-through entities such as LLCs, partnerships, and S corporations. This deduction, which allows eligible taxpayers to deduct up to 20% of their qualified business income, was previously set to expire. Its permanent status ensures that real estate income generated through these structures continues to benefit from this substantial tax reduction, making pass-through entities an even more attractive structure for real estate ventures. The OBBBA also adjusts the phase-in rules for higher-income taxpayers, broadening the benefit for some.
Renewed and Expanded Opportunity Zones
The OBBBA significantly renews and expands the Opportunity Zones program, offering compelling long-term capital gains benefits for investments in designated real estate areas. The program is now permanent, with a new decennial redesignation cycle for zones beginning July 1, 2026. While the existing deferral for gains invested in Opportunity Funds generally still runs until December 31, 2026, new investments made after December 31, 2026, will benefit from a rolling five-year gain deferral and a 10% basis step-up after five years. This extended and refined program aims to drive substantial new investment and development into economically distressed communities, creating significant opportunities for real estate firms seeking long-term, tax-advantaged projects.
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.