The recently enacted One Big Beautiful Bill Act (OBBBA) represents the most comprehensive federal tax reform in years, fundamentally reshaping how real estate owners, developers, and investment entities approach their long-term business and tax planning. Below, we outline the most significant changes affecting the real estate sector and share insights to support smarter investment decisions, project planning, and tax strategy under the new law.
Provisions Impacting Depreciation, Expensing, and Cost Recovery
The following provisions affect how and when real estate businesses treat and recover capital expenditure and financing costs.
Permanent 100% Bonus Depreciation
The OBBBA permanently reinstates 100% bonus depreciation under IRC §168(k) for qualifying property placed in service after January 19, 2025. This includes building systems, equipment, and certain improvements to nonresidential real property. The provision applies to both new and used property, eliminating the phase-down schedule that was in effect under prior law.
What This Means: Real estate businesses may now fully expense eligible improvements in the year the property is placed in service, rather than depreciating those costs over multiple years. This provision may reduce taxable income in capital-intensive years and introduce greater flexibility for firms undertaking renovation-heavy projects.
Expanded Section 179 Expensing
Effective for tax years beginning after December 31, 2024, the maximum Section 179 deduction increases to $2.5 million, with a phase-out threshold of $4 million. Both amounts are indexed for inflation. Similar to bonus depreciation, this provision allows businesses to immediately expense the full cost of qualifying equipment and certain improvements to nonresidential real property, rather than depreciating them over time.
What This Means: Owners and operators can expense more qualifying costs, such as HVAC systems, safety upgrades, and energy-efficient installations, within the same tax year. Real estate businesses managing mid-sized portfolios should consider how to combine expanded Section 179 expensing with bonus depreciation to maximize project-level tax efficiency.
Expanded Interest Deduction
The OBBBA reinstates the EBITDA-based limitation under IRC §163(j) for tax years beginning after December 31, 2024. This change reverses the EBIT-based limitation that has been in effect since 2022, allowing businesses to recapture depreciation, amortization, and depletion when calculating adjusted taxable income (ATI) for the 30% cap on business interest deductions.
What This Means: Businesses with significant non-cash expenses may now deduct more interest expense. Entities that previously elected out of §163(j) under the real property trade or business exception should reassess whether that election remains beneficial, especially if it limits access to bonus depreciation.
Qualified Production Property (QPP) Incentive
The OBBBA introduces a new 100% deduction for newly constructed nonresidential real property primarily used for manufacturing, production, or refining tangible personal property.
To qualify:
- Construction must begin after January 19, 2025
- Property must be placed in service before January 1, 2031
- The deduction excludes space used for office, lodging, parking, or administrative functions
What This Means: Although intended for manufacturing, the provision may allow developers constructing industrial buildings for qualifying use to deduct building costs in full. Developers should confirm tenant activity, intended use, and construction schedules to determine whether planned projects meet eligibility requirements under the new rules.
Provisions Impacting Entity Structuring and Tax Planning
These changes affect ownership frameworks, succession strategies, and state-level income tax planning.
Pass-Through Entity Tax (PTET) Planning Opportunities
The OBBBA preserves the federal deductibility of state and local taxes paid at the entity level under elective Pass-Through Entity Tax (PTET) regimes. While PTET programs were designed to bypass the $10,000 SALT cap that applies at the individual level under the TCJA, OBBBA increases the SALT cap to $40,000.
What This Means: Owners and partners in high-tax jurisdictions, such as New York and New Jersey, can continue to use PTET elections to reduce their federal taxable income. This strategy may improve after-tax cash flow and support more efficient income allocation across multi-tiered ownership structures. Firms should evaluate eligibility, projected income, and state-level credit mechanics when preparing their annual tax returns.
Estate and Gift Tax Exemption Made Permanent
Beginning in 2026, the unified federal estate and gift tax exemption is permanently set at $15 million per individual ($30 million for married couples), indexed for inflation.
What This Means: Real estate investors and family-owned businesses can transfer substantial property holdings up to this amount without triggering estate tax, supporting long-term succession and wealth preservation strategies. However, families and individuals should coordinate federal and state planning, especially in high-tax jurisdictions like New York and Massachusetts and consider trust structures that offer flexibility and protection.
REIT Subsidiary Asset Test Expansion
Effective January 1, 2026, the OBBBA increases the limit on a Real Estate Investment Trust’s (REIT’s) total asset value that can be invested in taxable REIT subsidiaries (TRSs) from 20% to 25%, restoring the threshold that was in place before 2018. This change applies to both new and existing REITs.
What This Means: REITs can invest a greater share of their total assets (up to 25%) in taxable subsidiaries. This change enables them to grow service-oriented businesses, such as property management or hospitality operations, without jeopardizing their REIT status. Investors should reassess their asset composition and subsidiary strategy to plan for the new threshold.
Provisions Impacting Investment Incentives
The below provisions target increased investment in designated communities.
Permanent Opportunity Zone Incentives
The Opportunity Zone (OZ) program is now permanent, replacing the original 2026 sunset with rolling 10-year designation cycles beginning July 1, 2026. Key updates include:
- Deferred gains are recognized five years after investment
- A 10% basis step-up applies to investments held for at least five years
- A new category of Qualified Rural Opportunity Funds (QROFS) offers a 30% basis step-up
- Enhanced reporting requirements apply to Qualified Opportunity Funds (QOFs) and OZ businesses
What This Means: Real estate investment firms can incorporate Opportunity Zone planning into long-range development and acquisition strategies. Those holding qualified investments for five years may benefit from basis increases and may prioritize rural projects. Firms should evaluate updated zone maps, reporting obligations, and structural changes to Qualified Opportunity Funds and Opportunity Zone Businesses.
Low-Income Housing Tax Credit (LIHTC) Enhancements
The OBBBA enacts several permanent modifications to IRC §42:
- Restores the 9% fixed credit rate for non-bond-financed new construction and substantial rehabilitation projects
- Increases annual state LIHTC allocations by 12%, starting in 2026
- Reduces the bond financing threshold from 50% to 25% of aggregate land and building costs for eligibility under the 4% credit, applicable to properties placed in service after December 31, 2025, if at least 5% of aggregate project costs are bond-financed
What This Means: Affordable housing developers may find more projects financially feasible with less reliance on tax-exempt bonds. These updates may also accelerate project closings and attract more investor equity into underserved markets.
Provisions Impacting Clean Energy Incentives
The OBBBA rolls back several clean energy tax provisions that had been introduced or expanded under the Inflation Reduction Act (IRA). The bill accelerates the sunsetting of key credits, imposes stricter domestic content requirements, and bars participation by certain foreign-affiliated entities.
These changes will impact investors, developers, and manufacturers operating in the renewable energy space.
Section 179D Removed: Energy-Efficient Commercial Building Property
Section 179D provides a tax deduction for energy-efficient commercial building property. The OBBBA adds a termination clause disqualifying any construction beginning after June 30, 2026, from taking a 179 deduction.
What This Means: Real estate developers and owners planning energy-efficient upgrades should evaluate construction timelines to preserve eligibility, given that projects must begin construction by mid-2026 to qualify.
ITC and PTC Eligibility Reduced for Wind, Solar, and Storage Projects
Taxpayers may claim the Section 48E Investment Tax Credit (ITC) for qualified investments in zero-emission facilities or energy storage technology. Alternatively, the Section 45Y Production Tax Credit (PTC) applies to electricity produced and sold by a qualifying facility. In this context, a “qualified facility” typically refers to a wind or solar energy property with net-zero greenhouse gas emissions.
To qualify, projects must meet the following compressed eligibility window:
- begin construction within 12 months of the OBBBA’s enactment (by July 4, 2026)
- be placed in service before December 31, 2027
What This Means: The eligibility window for wind, solar, and energy storage projects is significantly shortened compared to prior law. Developers should confirm construction and placement-in-service dates to preserve access to these credits before the new deadlines.
Provisions Impacting Accounting and Revenue Recognition
Updates to tax accounting methods provide flexibility in how and when income is recognized.
Exception to Percentage-of-Completion Method
The law allows residential developers to use the completed-contract method for buildings with more than four dwelling units, rather than the percentage-of-completion method, which requires recognizing income during the construction phase. This change applies to contracts entered into after enactment and is limited to developers meeting applicable gross receipts thresholds under IRC §448.
What This Means: Multi-family and condominium projects may now defer tax on income until substantial completion, potentially improving cash flow and aligning tax treatment more closely with project timelines.
Strategic Considerations for Real Estate Professionals
The OBBBA introduces a range of permanent and expanded tax incentives that can reshape how real estate businesses plan, invest, and grow.
To navigate these changes, real estate entities should consider:
- Reassessing depreciation schedules and cost segregation opportunities
- Modeling multi-year tax impacts under revised tax law
- Reviewing entity structure and PTET participation for pass-through optimization
- Evaluating Opportunity Zone strategies, including rural zone eligibility and compliance
- Updating estate plans and trust structures to leverage the permanent exemption thresholds
- Reviewing accounting methods for residential development projects to maximize deferral opportunities
Tailored Guidance on the OBBBA
The new federal tax landscape under the OBBBA is both expansive and consequential, reshaping how real estate businesses structure, invest, and plan. Reach out to a Grassi Advisor today, or contact Evan Fox to evaluate how these changes may impact your projects, portfolios, and succession plans and to develop a strategy tailored to your business goals.
