New Law, New Opportunities: Key Tax Changes Real Estate Investors Need to Know

President Trump signed the One Big Beautiful Bill Act (OBBBA) into law on July 4th, marking a significant legislative milestone. While the comprehensive legislation addresses policy changes across numerous sectors including healthcare, infrastructure, and financial services, this article examines the specific tax provisions within the OBBBA that are likely to have substantial implications for real estate investors.

Immediate 100% Expensing Returns

The Tax Cuts and Jobs Act of 2017 (TCJA) initially introduced 100% bonus depreciation for qualified property. From 2017 through 2022, real estate investors could immediately expense the full cost of qualifying improvements, equipment, and certain property components.

However, the TCJA included a built-in phase-out mechanism. Starting in 2023, bonus depreciation began declining by 20 percentage points annually, as follows:

The OBBBA restores 100% bonus depreciation, allowing taxpayers to immediately expense 100 percent of any qualified property used in a trade or business for properties acquired after January 19, 2025.

The enhanced bonus depreciation provisions make cost segregation studies exponentially more valuable once again. A cost segregation identifies building components eligible for accelerated depreciation by reclassifying them from real property (39-year depreciation) to personal property (5, 7, or 15-year depreciation).

Qualified Business Income Deduction Made Permanent

The qualified business income (QBI) deduction, generally 20% of business income generated via sole proprietorships, partnerships, or S corporations, including LLCs taxed as flow-through entities, is now permanent under the OBBBA (it previously was scheduled to expire at the end of 2025). Real estate investors owning real estate that qualifies as a trade or business under Section 162 will continue to benefit from this deduction.

Business Interest Limitation Modified to Become More Favorable

Real estate investing is a capital-intensive business that often relies on debt financing. The ability to deduct interest on that debt was affected by the business interest limitation introduced by the TCJA. This rule limits deductible interest to 30% of a defined income amount. Any excess interest is carried forward indefinitely for potential deduction in future years when the limitation permits.

Certain real estate trades or businesses can elect out of this limitation. The trade-off? They have to use the alternative depreciation system (ADS), which slows down depreciation deductions – especially for residential rental property.

Additionally, businesses with average annual gross receipts below specified thresholds over the previous three years are generally exempt from the business interest limitation.

Without either the opt-out election or the small business exception, many real estate investors are directly impacted by this limitation. Since its introduction, the method for calculating the income limit has changed. Originally, depreciation was added back to income, which increased the amount of interest that could be deducted. But starting in 2022, depreciation became a subtraction, substantially reducing the amount of allowable interest expense deductions.

The OBBBA reverses this restrictive change by reinstating the more favorable add-back treatment for depreciation. This permanent modification ensures that real estate investors aren’t penalized for claiming higher depreciation while still servicing debt used to finance their operations. The provision takes effect for taxable years beginning after December 31, 2024.

Energy-Efficient Building Tax Incentives Terminated

The OBBBA makes major changes to clean energy tax credits and incentives that were originally expanded under the Inflation Reduction Act (IRA). One of the most significant changes for commercial real estate investors is the elimination of the Section 179D deduction. This deduction encouraged energy-efficient upgrades to commercial buildings by offering a tax deduction of up to $5.81 per square foot. Under the OBBBA, this deduction will be terminated for any property that begins construction after June 30, 2026.

Qualified Opportunity Zone Program Expanded

The OBBBA effectively creates a new Qualified Opportunity Zone (QOZ) program and leaves the original QOZ program unchanged. The table below compares the key tax provisions of both the original and the new OBBB version of the programs:

The introduction of the new QOZ program under the OBBBA represents a significant expansion and enhancement of opportunity zone incentives. While the original program provided temporary benefits with a clear sunset date, the new program offers permanent status with more generous basis step-up provisions, particularly for rural investments through the new Qualified Rural Opportunity Fund structure. The extended capital gain deferral period and the ability to designate new zones every decade ensures that the program will continue to drive investment into economically distressed communities well beyond 2026.

Conclusion

The OBBBA represents a transformative shift in the tax landscape for real estate investors, through the restoration of 100% bonus depreciation, more favorable business interest limitation calculations, and the permanent extension of the QBI deduction, while simultaneously eliminating the Section 179D energy-efficient building deduction after 2026. The expanded Qualified Opportunity Zone program with enhanced rural investment incentives creates additional planning opportunities that, when combined with the restored bonus depreciation benefits, provide unprecedented tax optimization potential for strategic investors.

These provisions are complex and often time-sensitive, so it helps to have someone in your corner. Our real estate tax team understands the nuances and can work with you to create practical strategies that make the most of these opportunities.

If you have questions about how these potential changes could impact you and your business, please contact your Dean Dorton advisor.