After months of review and amendment by the Senate, on July 4, 2025, President Trump signed H.R.1, the “One Big Beautiful Bill Act” (OBBBA). Known as a reconciliation bill, it outlines the administrative priorities for spending, revenue, and borrowing and is estimated by some observers to provide between $850 billion to $1.1 trillion in net tax cuts over ten years. Beyond extending numerous Tax Cuts and Jobs Act (TCJA) measures, the bill significantly reshapes commercial real estate tax incentives through modified and expanded programs designed to incentives new development and investment in infrastructure. OBBBA also made no changes specific to 1031 Exchanges for tax deferral on qualifying real estate transactions, which was a significant “win” for real estate investors of all sizes.
Qualified Opportunity Zone Program 2.0: From Temporary Incentive to Permanent Policy
What is a Qualified Opportunity Zone?
A Qualified Opportunity Zone (QOZ) is a designated geographic area in the United States that is eligible for private investments for development to receive significant tax benefits. They are aimed at stimulating economic growth and job created in underserved communities through private investment.
QOZ Program as part of TCJA of 2017
The original QOZ program was created in 2017 within the Tax Cuts and Jobs Act and was designed as a temporary measure to encourage investment into underserved and economically distressed communities by offering temporary deferral of capital gains tax. For qualifying real estate transactions, the tax deferral lasted until the earlier of the date that the Qualified Opportunity Fund (QOF) was sold/exited, or December 31, 2026.
Additional tax incentives were offered on QOF investments acquired in transactions prior to 2022, including the reduction in capital gain tax owed based on the duration the QOF was held, specifically:
- For a QOF held for 5 years, 10% of the gain was excluded from taxes on the deferred gain
- For a QOF held for 7 years, 15% of the gain was excluded from taxes on the QOF
- For a QOF held for 10+ years, any gains from the QOF investment itself were entirely tax free
- Note: The tax on the original deferred gain was still owed
Qualified Opportunity Zone Program as part of the “One Big Beautiful Bill Act”
The Qualified Opportunity Zone Program that was set to sunset at the end of 2026, is now permanent, with some revisions and some additional eligibility criteria. For investments made prior to January 1, 2027, the program is largely unchanged, and the deferred gains will be recognized upon sale of the QOF or December 31, 2026.
For investments made after January 1, 2027, the following changes apply to investments through the QOZ program:
- Stricter eligibility for new zones including the median family income must be less than or equal to 70% of the state/metro median or have a poverty rate greater or equal to 20% and median family income less than or equal to 125% of the median for that state or metropolitan area.
- The Contiguous Tract rule is repealed, as is the blanket designation which applied to entire US territories such as Puerto Rico
- Deferred gains will be recognized exactly 5 years after the investment or upon sale. The rolling 5-year deferral allows gains deferral to be tied directly to the time of the actual investment.
- The step-up for QOFs held for 7 years has been eliminated. The single 10% step-up in basis will apply to QOFs greater than 5 years.
- Introduction of Qualified Rural Opportunity Funds (QROFs), specific to non-urban areas, with greater tax incentives tied to investments held over longer periods.
- QROFs are very much like QOZs, except that they are exclusive to rural areas, defined as non-urban areas outside of towns with populations less than 50,000
- Investments held over 5 years receive a 30% basis increase compared to 10% with other QOFs
- The substantial improvement requirement of QOZs is significantly reduced from 100% of the adjusted basis to just 50%.
The impact of this modified Qualified Opportunity Program within the OBBBA on the real estate market, specifically investment real estate, aims to incentivize development through extended deferral benefits, additional deferral potential for long-term holdings and new incentives to invest in rural areas under the QROF provisions. Overall, this program looks attract long-term investments in areas that need it the most which will help stimulate the CRE market, as well as local economies of these designated areas through new job creation.
Qualified Business Income (QBI) Deduction for Pass-through Real Estate & REITS (Section 110005/ IRC § 199A)
What is the Qualified Business Income Deduction?
The Qualified Business Income Deduction (QBI) allows eligible disregarded entities, including sole proprietors, partnerships, S-corps, and some trusts and estates to deduct up to 20% of their qualified business income from their federal income tax. The 20% deduction also applies to Qualified REIT Dividends, which is any dividend from a REIT that is not a capital gain or return of capital under under IRC § 1(h)(11).
Origins of the QBI Deduction in the TCJA of 2017
Also known as the Section 199A deduction, the QBI Deduction was established in the TCJA of 2017 to provide disregarded entities, or pass-through businesses that meet a specific income threshold, a similar tax cut to the corporate tax reduction from 35% to 21% within the TCJA. It also provided the same tax reduction to REIT investors that received Qualified REIT Dividends. The deduction was originally scheduled to sunset on December 31, 2025.
QBI Deduction within the OBBBA
The QBI Deduction was made permanent within the OBBBA. Specific to the Qualified REIT Dividends the 20% tax reduction was extended. For Qualified Business Income specific to pass-through businesses, the 20% QBI deduction was also extended and adjustments were made to some previous limitations with additional clarification added for some sectors. Additional adjustments in OBBBA specific to QBI include the following:
- Broadened access to the QBI deduction, mainly for Specified Service Trades or Businesses (SSTBs), by eliminating the disqualification of a SSTB based on business type alone.
- Common SSTBs, are defined as businesses “where the principal asset is the reputation or skill of one or more of its employees or owners”, this includes:
- Doctors, Dentists and other health professionals
- Lawyers
- Accountants
- Financial Advisors
- Brokerage Services
- Common SSTBs, are defined as businesses “where the principal asset is the reputation or skill of one or more of its employees or owners”, this includes:
- Created uniformity in phase-out threshold based on income and wage/property regardless of business type,
- Simplified the wage/property limitation to the greater of:
- 50% of the W-2 wages paid by the business
- 25% of the W-2 wages paid by the business plus 2.4% of the unadjusted basis of qualified property
The desired impact for the QBI Deductions within the OBBBA includes creating a level playing field across all industries to support small to mid-size businesses that make up the majority of pass-through entities. It is designed to offset the corporate tax rate cuts previously granted and boost after-tax cash flow and encourage business creation by incentivizing self-employee and business formation. For a real estate investor the practical application of this would be the if they receive $500,000 in net rental income, (QBI), they can deduct $100,000, which is 20%, from their taxable income.
Bonus Depreciation & Section 179 Expensing for Real Property
What is Bonus Depreciation?
Bonus depreciation is the ability to immediately deduct 100% of a purchase price or expense in the year it took place, rather than having to depreciate it across several years. In relation to real estate, only Qualified Improvement Property (QIP) qualifies for Bonus Depreciation, this does not include buildings, land, or land improvements; but does include items within the interior of a building such as HVAC, plumbing, lighting, etc. It is not uncommon for a cost segregation report to be required to identify what qualifies as a QIP for bonus depreciation treatment.
Introduction of Bonus Depreciation
Bonus depreciation was first introduced in 2001 as part of Economic Stimulus Act to encourage investment after 9/11. At the time, 30% Bonus Depreciation was available for qualified property and expenses. Over the next two decades various legislation increased and/or reinstated Bonus Depreciation including:
- 2003: Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) increased to 50% with a sunset of December 21, 2004
- 2008 – 2010: Financial Crisis Stimulus: temporarily reinstated the 50% bonus depreciation across various Acts with an official sunset of December 31, 2012
- 2015: PATH Act: Made 50% bonus depreciation permanent through 2017
- TCJA of 2017: Increased to 100% bonus depreciation and allowed used property that met specific criteria to qualify
Bonus Depreciation as part of the OBBBA
100% bonus depreciation instated by the TCJA of 2017 had started a phase-out in 2023 dropping to 80% and then dropping 20% each year after, for a complete phase-out in 2027. The OBBBA permanently extended 100% bonus depreciation for expenses occurred on or after January 20, 2025.
In addition to making 100% bonus depreciation permanent, the eligibility of real estate related assets was expanded with some additional clarification provided. Expansion of 100% bonus depreciation eligibility specific to real estate within the OBBBA includes:
- Qualified Production Properties (QPP), real property integral to the production capabilities of manufacturing, refining, agricultural or other production activities.
- Energy-efficient systems and green infrastructure, i.e. Solar panels, geothermal heating, EV charging stations is they meet the “MACRS 20-year or less” criteria
The intent of extended bonus depreciations as part of the OBBBA includes stimulating capital investment by providing immediate tax incentives that can help offset gain, as well as to encourage small to mid-size business to reinvest in the US manufacturing and infrastructure.
Business Interest Expense Deduction Limitation Expansion
What is Business Interest Expense?
Business interest expenses are costs incurred by a business for borrowing money to conduct business operations, make investments and acquire assets, this includes lines of credit, interest paid on loans and other debts. Businesses are able to deduct these expenses from their taxable income based upon specific rules and limits.
Origination of Business Interest Expense Deduction
The TCJA of 2017 introduced significant limits on business interest expense deductions in an effort to reduce excessive borrowing and to promote a more balanced financial structure for businesses with less incentive to carry debt. It was also a measure to offset some of the other tax cuts within the TCJA including the Corporate Tax Cut. Deductions were capped at 30% of Adjusted Taxable Income (ATI) from 2018-2021, then 30% of Earning Before Interest and Taxes (EBIT) after 2021.
Modifications to the Business Interest Expense Deduction in the OBBBA
The Business Interest Expense Deduction was modified within the OBBBA, including the definition of taxable income and the cap, as well as made permanent. Under the OBBBA, calculated income is now Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), not EBIT, the cap was increased from 30% to 50% for most businesses, the gross receipts threshold was increased from $27 million to $35 million to adjust for inflation, and more small to medium sized business are no fully exempt from deduction limits.
Outlook for Expansion of Business Interest Expense Deductions
The intention of increasing the cap on deductions, making modifications to the opt-out requirements and the exemption threshold within the OBBBA is to encourage investment in capital, reduce the cost of capital in turn stimulating development. With businesses able to deduct more of the interest expense they will be more willing to borrow for new developments and improvements to existing developments.
Low-Income Housing Tax Credits (LIHTC): Rural & Tribal Boosts
What are Low-Income Housing Tax Credits?
Low-Income Housing Tax Credits (LIHTC) are incentives available to developers of qualifying affordable housing projects to help subsidize the acquisition, construction, and rehabilitation of affordable rental housing for low-income tenants.
Let’s look at a simple example of how LIHTC are used in a real-life scenario. A developer applies for the LIHTCs and receives them based on their qualifying development project. They then sell those tax credits to a private institution in exchange for equity capital for their development project. The developer receives the capital needed for the project and the private institution receives a dollar-for-dollar match in tax credits for 10 years against their taxable income. In addition to developing additional affordable housing, the developer is able to offer housing at more affordable rates since they were able to take on less debt.
Origination of LIHTC
LIHTC was introduced in the Tax Reform Act of 1986 and is one of the longest standing programs to incentivize the development of affordable housing. Most recently the general requirements and limitations for LIHTC included:
- States receiving an annual allocation of tax credits based on population, $2.75 per capita in 2023
- Housing had to remain affordable for a minimum of 15 years, sometimes up to 30 years
- Rents and tenant incomes were capped at 60% of Area Median Income (AMI) or below
- Investors who exchange equity for credits received the credits over a 10-year period
Alterations to LIHTC in the OBBBA
The OBBBA included an expansion and modernization to LIHTCs. Specifically, it increased the per-capita credit cap by 12% and added additional credits for rural and tribal area developments, including areas impacted by natural disasters; replaced the 60% AMI cap with an average 30%-80% AMI; simplified the financing for projects that included tax-exempt bond financing; and allowed for the transfer of unused credits across states in emergency situations.
The desired outcome to these modifications of LIHTCs is to make it easier for developers to finance development projects in rural and low-income areas, provide institutions an incentive to invest in these types of projects, and add more affordable housing options to heavily populated areas in needs of additional housing.
A Long-Term Vision for Real Estate Growth based on the OBBBA
The OBBBA marks a substantial and strategic shift in U.S. tax and economic policy, particularly with regard to commercial real estate investment, development, and financing. By extending, expanding, and in many cases permanently instating provisions that were originally introduced under the 2017 Tax Cuts and Jobs Act (TCJA), the OBBBA strives to build a new framework of long-term certainty and opportunity for real estate investors, developers, and stakeholders across the country.
The OBBBA provides a coherent framework for economic growth through real estate investment. Whether through increased deductions, improved financing structures, or more targeted community investment incentives, the bill is structured to:
- Encourage private capital deployment into economically distressed and rural areas
- Lower barriers to entry and increase after-tax returns for small and mid-sized real estate investors
- Promote sustainable development and modernized infrastructure
- Stimulate the affordable housing pipeline across diverse regions of the country
In an attempt to preserve and strengthen real estate-centric tax incentives, these inclusions in the OBBBA prioritizes commercial real estate to be a central driver of economic activity, revitalization, and housing production. Investors, developers, and community planners should closely review these changes and consider how to strategically position their portfolios in light of this sweeping legislative shift.
This article provides a general summary of select provisions within the One Big Beautiful Bill Act (OBBBA) and is not intended as legal, tax, or investment advice. Individuals and businesses should consult with their tax advisor, legal counsel, and broader advisory team to understand how these changes specifically impact their unique circumstances.