OBBB Impact on Real Estate

The following is an overview of some of the primary real estate-related tax provisions in the recently enacted tax and budget law, also known as the One Big Beautiful Bill (OBBB), and their potential impact on real estate businesses and their owners, operators, and investors.

Provisions affecting real estate and construction businesses

Section 163(j). Effective Jan. 1, 2025, the OBBB permanently changes from using earnings before interest and taxes (EBIT) to using earnings before interest, taxes, depreciation, and amortization (EBITDA) to determine the income base for calculating the deductible portion of business interest. This change generally will result in a higher amount of deductible interest.

Although real estate businesses can choose to elect out of the Section 163(j) limitation, opting out comes at the cost of extending the time over which certain depreciation deductions can be taken, including bonus depreciation on certain assets. As a result, an increase in deductible interest can be useful to real estate businesses that do not elect out of Section 163(j) so they can still take full advantage of the bonus and other accelerated depreciation methods.

Taxable real estate investment trust (REIT) subsidiaries. The percentage of a REIT’s assets that can consist of non-real-estate-like securities of a taxable REIT subsidiary (TRS) increases from 20% to 25%. This change provides REITs with greater flexibility in owning property and conducting business through a TRS that otherwise could not be owned or conducted by a REIT itself. For example, a REIT could hold and sell more dealer-type property through its TRS. If such property was sold directly by the REIT, the sales could be subject to a 100% prohibited transactions tax.

100% bonus depreciation. Effective Jan. 20, 2025, immediate 100% expensing of equipment, machinery, leasehold improvements, and nonresidential interior improvements is reinstated permanently. Immediate depreciation in the year in which eligible assets are placed in service can provide significant tax savings.

Immediate expensing of qualified production property. A new provision allows immediate expensing of nonresidential real property that is used to manufacture, produce, or refine a qualified product. Construction must begin between Jan. 19, 2025, and Dec. 31, 2028, and the property must be placed in service before Jan. 1, 2031. These significant tax benefits are expected to spur investment in factories and manufacturing and refining facilities that could benefit the real estate construction industry overall.

Completed contract method. A new exception eliminates the requirement to use the percentage of completion method (PCM) of tax accounting for almost all residential construction contracts, including condos, entered into in taxable years beginning after July 4, 2025. Before OBBB, a condo developer generally was required to use the PCM to calculate its taxable income, which could result in phantom income from pre-sold units due to the inability to offset the full cost of the sold unit against income determined under the PCM. The new rule aims to eliminate this mismatch.

Termination of clean energy incentives accelerated. Generally, qualifying wind and solar projects that begin construction after July 4, 2026, must be placed in service by the end of 2027 to qualify for the Section 48E investment tax credit. To qualify for the Section 179D deduction for energy-efficient commercial buildings, construction must begin by June 30, 2026. The credit for energy-efficient homes under Section 45L applies only to homes acquired on or before June 30, 2026.

Crowe observation

Although these provisions are expiring on a more accelerated basis, owners of real estate still might be able to take advantage of these provisions while they remain in effect to develop qualifying projects. For instance, real estate owners might be able to lease their real estate to or enter a joint venture with a developer to share in some of the related economic and tax benefits.

Provisions affecting real estate owners and investors

Section 199A. The Section 199A 20% deduction for pass-through income is permanently extended, which generally includes income from the operation of real estate and ordinary REIT dividends. Without extension of Section 199A, which was set to expire in 2025, real estate and REIT investors would have seen their effective income tax rate on such income increase from 29.6% to 37%.

SALT cap. The cap on the deductibility of state and local tax (SALT cap) is temporarily increased from $10,000 to $40,000 for 2025 and then adjusted 1% per year through 2029, with a phase-down for taxpayers at higher income levels. The SALT cap reverts to $10,000 beginning in 2030. For investors and owners below the gross income thresholds or those that live or invest in states that impose an income tax, the increased SALT deduction can be significant.

Individual tax rates. The reduced individual tax rates remain at their current percentages, with the highest marginal rate of 37%.

Opportunity zones. With some changes, the OBBB permanently extends the tax benefits of investing realized capital gains into a qualified opportunity fund (QOF), continuing the five-year deferral of invested capital gains and tax-free treatment on the sale of the QOF interest (or underlying property) held for 10 years or more.

Looking ahead

The OBBB includes numerous tax changes that are beneficial for the real estate and construction industry. Understanding the breadth of these sweeping changes and how the numerous provisions interact is a complex undertaking that will take significant planning and modeling. Real estate and construction industry participants should consult with their tax adviser to consider how the OBBB tax changes impact their particular facts and circumstances.