Real Estate Has Tax Planning Opportunities in New Law

As seen in Bloomberg Tax

The recently enacted One Big Beautiful Bill Act (OBBBA) brings about significant changes for the real estate industry, offering opportunities and new considerations for tax planning for real estate businesses and professionals alike. Since a majority of the real estate related amendments are permanent extensions or modifications of existing tax provisions, understanding these provisions can substantially assist real estate professionals in optimizing their tax planning and compliance.

The following outlines some of the most significant changes that will likely impact the real estate industry:

Passthrough-Entity Taxes (PTET) Deduction

Despite various proposals that either limited or eliminated the PTET deduction, the Act did not pass any restrictions on the deduction, and therefore the PTET regimes remain intact, notwithstanding the temporary increase of the SALT deduction.

Most states have enacted permanent PTET regimes or are linked to the federal SALT cap. As such, these regimes will continue under OBBBA. However, some states have PTET programs that are scheduled to expire on December 31, 2025, and would need new legislation to extend such deductions.

Bonus Depreciation

The Act permanently reinstates the 100% bonus expensing for qualified property. This is effective for property placed in service after January 19, 2025. Real estate businesses will be able to immediately expense the full cost of qualifying assets, which can significantly impact cash flow and tax obligations.

An important consideration under the new Act is that taxpayers also have the option of using the pre-OBBBA bonus depreciation phase-down rates instead of 100% expensing, via an election on their tax return.

Property placed in service from January 1, 2025, through January 19, 2025, will have a bonus depreciation rate of 40%.

While this presents a significant advantage for real estate professionals, it’s important to consider the potential state-level nonconformity, as various states may not follow these federal provisions. Likewise, net losses resulting from the use of bonus depreciation could give rise to Section 461(l) Excess Business Losses limitations. See related paragraph below.

Section 179 Deduction

The OBBBA increases the maximum Section 179 deduction from $1,000,000 to $2,500,000 and raises the phaseout threshold from $2,500,000 to $4,000,000. The enhanced Section 179 deduction applies for property placed in service after December 31, 2024, allowing businesses to immediately expense a larger portion of their qualifying property purchases.

Beyond the general applicability of Section 179 to personal property, Section 179 also extends to Qualified Improvement Property and certain nonresidential building improvements, including roofs, HVAC systems, fire protection and alarm systems, and security systems. However, taxpayers should be aware that the Section 179 deduction is limited to the amount of taxable income from active trade or business activities. Any portion of the deduction that exceeds taxable income is carried forward and can be used in future years when there is sufficient income. In addition, it’s important to note that estates and trusts are not eligible to claim the Section 179 deduction. As with bonus depreciation, taxpayers should carefully consider state tax conformity rules on the increased Section 179 deduction.

Section 163(j) Interest Expense Limitation

Under Section 163(j), business interest expense, in general, was deductible by a taxpayer to the extent the deduction was less than 30% of the taxpayer’s adjusted taxable income (ATI). The limitation applies to all taxpayers except for a small business with average annual gross receipts for the three prior tax years that do not exceed a certain threshold amount ($31 million for 2025). For tax years beginning after 2021, ATI was calculated without adding back depreciation and amortization expenses. The OBBBA reinstates the prior method of calculating ATI by allowing the addition of depreciation and amortization back into the formula. This new calculation effectively expands the base amount for the 30% limitation, thus allowing for a larger interest expense deduction. For taxpayers who are subject to this limitation, the OBBBA preserves the real estate election out of Section 163(j).

It is also important to note that under the new Act, there is a new ordering rule to coordinate the interest limitation with capitalization provisions. Certain interest expenses that were previously capitalized will now be subject to the Section 163(j) interest expense limitation provisions prior to the capitalization provisions. This new ordering rule is effective for tax years beginning after December 31, 2025.

Qualified Business Income (QBI) Deduction

The Act makes the 20% QBI deduction permanent for qualified active trades or businesses. Income thresholds for QBI deduction limitations have also increased. The new phase-in ranges are $75,000 for single filers and $150,000 for joint filers, which will be indexed for inflation after 2026.

Elimination of Energy Credits

The OBBBA marks the expiration of certain energy credits, a significant change for real estate developers and owners planning energy-efficient improvements and construction. Both the 30% energy-efficient home improvement and 30% residential clean energy credits will expire by December 31, 2025. The Section 45L Energy Efficient Home Credit (construction or manufacture of new energy-efficient homes) will not apply to qualified homes acquired after June 30, 2026. Likewise, the Section 179D credit for energy-efficient commercial buildings will no longer be available for construction projects beginning after June 30, 2026.

There are also several other Energy Credits that are scheduled to expire. Taxpayers in the process of adding energy-efficient improvements, or planning or constructing commercial buildings, should act promptly if they wish to claim these energy credits.

Section 461(l) Excess Business Losses (EBL)

This provision was set to expire after December 31, 2028. The OBBBA has made this tax provision permanent. As a result, noncorporate taxpayers, including individuals, trusts, and estates, will remain subject to limitations on the amount of net business losses they may deduct against non-business income. For the 2025 tax year, the EBL thresholds are $313,000 for single filers and $626,000 for joint filers. However, in tax years beginning after December 31, 2025, the cap is re-indexed and decreased to $250,000 for single filers and $500,000 for joint filers. These re-indexed decreased amounts will be inflation adjusted annually in subsequent years. It is also important to note that disallowed excess business losses will continue to be treated as net operating loss (NOL) carryforwards.

Completed Contract Method of Accounting for Residential Buildings

The new Act makes a significant change to the rules requiring the usage of the percentage completion method of accounting for long-term contracts.

Prior to the OBBBA, the completed contract method was only allowed for home construction contracts, which exclusively included residential buildings with four or fewer units. The OBBBA has expanded the exemption to include residential construction contracts in addition to home construction contracts. Residential construction contracts refer to projects involving the construction of buildings with more than four dwelling units. The change will take effect for contracts entered into after July 4, 2025.

Qualified Opportunity Zones Business (QOZB)

The bill has significantly overhauled and expanded the previous QOZB tax provisions. Because of its complexities, Anchin’s Real Estate team will be addressing these provisions in a separate article coming shortly.

Conclusion

The OBBBA unlocks powerful incentives such as the permanent 100% bonus depreciation, the extended Section 199A QBI deduction, and a more favorable Section 163(j) interest expense calculation. Developers and contractors also have a window to capitalize on provisions for new construction, but those eyeing energy-efficient projects must move quickly before related credits sunset.

With the Section 461(l) excess business loss rules now permanent, the stakes are higher than ever—making proactive, strategic tax planning essential to fully capture these opportunities and safeguard long-term returns. For more information, please contact Mark Schneider, Suerische (Sue) Villarosa, or your Anchin Relationship Partner. 

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.