The recent introduction of the One Big Beautiful Bill Act (OBBBA) brings significant tax changes that could impact your real estate investments. We’ve analyzed the key provisions to help you understand what these changes mean for your portfolio.
Key Changes That Affect You
1. QBI Deduction Now Permanent
The Qualified Business Income (QBI) deduction under Section 199A, which was set to expire after 2025, is now permanent.
What this means for you:
- Pass-through real estate sponsors and investors can continue claiming up to 20% deduction on qualifying business income.
- Long-term tax planning becomes more predictable.
- No need to restructure investments before 2025.
2. 100% Bonus Depreciation Made Permanent
The legislation eliminates the scheduled phase-down of bonus depreciation, keeping it at 100% indefinitely.
Impact on your investments:
- Immediate expensing of eligible property costs (typically 20-year recovery period or less).
- Includes certain improvements and personal property in real estate operations.
- Transitional election available for first year: choose 40% or 60% if beneficial.
- Significantly improves cash flow in acquisition year.
3. Section 179 Limits Increased
The maximum Section 179 expensing increases from $1 million to $2.5 million, with the phase-out threshold rising from $2.5 million to $4 million.
Benefits for smaller investments:
- More flexibility for sponsors of smaller real estate businesses.
- Enhanced deductions for personal property investments.
- Both limits will adjust for inflation going forward.
4. Business Interest Deduction Enhanced
The 30% EBITDA limitation (instead of EBIT) for business interest deductions is now permanent.
Why this matters:
- Higher deductible interest amounts for leveraged real estate projects.
- Depreciation and amortization add back to the calculation.
- Particularly valuable for highly leveraged investments.
- Improved cash flow for debt-financed properties.
5. Opportunity Zones Renewed and Enhanced
Opportunity Zone benefits receive significant updates and extensions.
New opportunities include:
- Decennial renewal: OZ designations refresh every 10 years.
- Rural focus: New Qualified Rural Opportunity Funds with enhanced benefits (30% basis step-up after 5 years).
- Extended benefits: Maintained 10-year exclusion of post-investment appreciation.
- Expanded reporting: New requirements for QOFs and businesses.
6. Industrial Real Estate Benefits
New 100% expense for nonresidential real property used in qualified production activities. Construction should begin after January 19, 2025 and before January 1, 2029, and the property must be placed in service prior to January 1, 2031.
Relevant for:
- Manufacturing facilities.
- Refining operations.
- Other qualified production properties.
- Note: Recapture rules apply.
7. Residential Construction Exception Expanded
The percentage of completion exception now includes more residential construction contracts with a 3-year completion test for non-home contracts.
Impact:
- More flexible accounting methods for residential developers.
- Potentially improved cash flow timing.
What You Should Do Next
1. Review your current portfolio to identify properties that benefit from these changes.
2. Assess timing for planned acquisitions to maximize bonus depreciation benefits.
3. Consider Opportunity Zone investments, especially in rural areas.
4. Evaluate financing structures to optimize enhanced interest deduction limits.
Important Considerations
These provisions represent significant opportunities, but individual circumstances vary. The interplay between different tax benefits can be complex, and optimal strategies depend on your specific investment structure and goals.
Please reach out to the Saville team if you have any questions about the impact of these changes.