Several provisions contained in the One Big Beautiful Bill Act (OBBBA) will provide considerable tax certainty to taxpayers engaged in real estate development or investment in real estate assets and offer favorable tax planning opportunities.
Two of the most significant of these provisions, the permanent restoration of 100% bonus depreciation and of depreciation for interest limitation purposes, will counterbalance one another to an extent. As taxpayers plan for real estate acquisitions and development in the 2026 tax year and beyond, they should model and analyze the impact on the OBBBA to drive tax efficiency from these activities.
Depreciation addback under Section 163(j)
For those in the real estate industry, perhaps the most significant change in the OBBBA is the reinstatement of favorable rules for computing the amount of business interest expense deductible under Section 163(j). The Tax Cuts and Jobs Act (TCJA), enacted in 2017, amended Section 163(j) to limit the deduction of business interest expense to the sum of a taxpayer’s business interest income, floor-plan financing interest and 30% of its adjusted taxable income (ATI) for the year.
The starting point for determining a company’s ATI for any given year is its taxable income, without regard to section 163(j). For tax years beginning before Jan. 1, 2022, any deduction allowable for depreciation, amortization or depletion was added back to tentative taxable income to arrive at ATI (essentially a tax-basis EBITDA). However, for tax years beginning after Jan. 1, 2022, taxpayers had to compute ATI to include depreciation and amortization deductions (tax-basis EBIT), reducing the amount of ATI to which the limitation applied and resulting in a lower amount of deductible interest expense.
Certain real property trades or businesses and certain farming businesses may elect to be exempt from applying the Section 163(j) interest limitation rules, and that election is generally irrevocable once made. Electing trades or businesses are required to depreciate nonresidential real property, residential rental property and qualified improvement property using the alternative depreciation system (ADS), which also makes the assets ineligible for bonus depreciation.
Many levered real estate businesses previously made real property trade or business elections to preserve their ability to deduct interest expense. Many taxpayers who were unable, or chose not to elect, to be exempt started to have significant interest expense limitations in 2022-2024 as interest rates climbed and the limitation on business interest deductions became more restrictive under the EBIT framework. The OBBBA restored and made permanent the computation of ATI without regard to depreciation, amortization or depletion for tax years beginning after Dec. 31, 2024.
Grant Thornton insight:
Many businesses should benefit from the return to a tax-basis EBITDA-based computation of ATI because it will generally increase the amount of interest deductible in any given year for companies with depreciation, amortization or depletion, including those holding real estate assets. However, because the election to be exempt from Section 163(j) is irrevocable, many real estate businesses that previously elected out will not be impacted by the reintroduction of the EBITDA-based computation of ATI (or the reintroduction of 100% bonus depreciation, as discussed below).
Reinstatement of 100% bonus depreciation
The OBBBA also permanently restored 100% bonus depreciation for qualified property. This reverses the phasedown schedule enacted under the TCJA, which would have reduced bonus depreciation to 40% for property placed in service in 2025 and eliminated it entirely by 2027. To qualify for the increased bonus depreciation rate, property needs to have been acquired and placed in service after Jan. 19, 2025. The acquisition date of property for purposes of bonus depreciation is generally the date on which the buyer enters a written binding contract.
The reinstated provision can apply to most tangible property with a recovery period of 20 years or less. While neither residential nor commercial real estate structures directly qualify for bonus depreciation, a cost segregation study often will identify shorter-lived components, allowing bonus depreciation to apply to at least a portion of an investment’s overall tax basis.
Section 179 expensing
The OBBBA also increased the Section 179 expensing limit and phaseout threshold, though the changes are modest relative to the broader expensing provisions. The new thresholds are intended to keep pace with inflation and allow small- and mid-sized businesses to immediately expense a greater portion of their capital investments.
Section 179 remains particularly useful for property types not eligible for bonus depreciation, such as certain improvements to nonresidential real property (e.g., roofs, HVAC systems and security systems). The OBBBA increased the maximum deduction from $1 million to $2.5 million and the phaseout threshold from $2.5 million to $4 million of property placed in service during the year for taxable years beginning after 2024. Both amounts will be indexed for inflation for taxable years beginning after 2025.
Grant Thornton insight:
While Section 179 is often overshadowed by bonus depreciation, it remains a valuable tool for smaller businesses and for property types excluded from Section 168(k). Taxpayers should consider whether electing Section 179 treatment provides better flexibility, especially in states that conform more closely to Section 179 than to bonus depreciation.
As with bonus depreciation, only a subset of the property acquired by most real estate businesses is expected to qualify for expensing under Section 179. As such, it will be imperative to document the basis of property qualifying for accelerated depreciation through a cost segregation study.
Grant Thornton insight:
While accelerated depreciation provides an immediate tax benefit, it also impacts a taxpayer’s interest limitation under Section 163(j) for years afterwards. Modeling the impact of accelerated deductions on taxable income, interest limitations and state conformity will be critical to optimizing the benefits of these provisions. For some taxpayers, frontloading depreciation deductions in early years may not result in a significant interest limitation in later years.
On the other hand, taxpayers may choose to elect out of bonus depreciation where the upfront benefit is outweighed by Section 163(j) interest limitations (brought about by smaller depreciation addbacks) in later periods. Finally, taxpayers may find the prospect of significant interest limitations, even with depreciation addbacks, so onerous that they will need to accept ADS in order elect out of Section 163(j). Taxpayers will need to model to effectively optimize the application of these provisions to their circumstances.
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Additional OBBBA provisions
A variety of other provisions will impact taxpayers in specific circumstances.
- Accelerated cost recovery for qualified production property: The OBBBA introduced Section 168(n), which allows for 100% expensing of certain non-residential real property used in a qualified production activity within the U.S. This provision significantly accelerates depreciation on certain property used in manufacturing, refining, and agricultural and chemical production that is otherwise depreciable over 39 years. For the property to qualify, construction must begin after Jan. 19, 2025, and before Jan. 1, 2029, and must be placed in service before Jan. 1, 2031.
- Qualified opportunity zones: The bill made permanent the benefits available to investments in qualified opportunity zones (QOZs) that were introduced by the TCJA, with certain modifications. Deferred gains invested in qualified opportunity funds (QOFs) after Dec. 31, 2026, will be included in income on the earlier of either (i) the date the investment is sold or exchanged, or (ii) five years after the date the investment in the qualified opportunity fund was made. Taxpayers holding their QOF investments for at least five years will receive a basis increase in their investment equal to 10% of the original deferred gain. The basis increase is enhanced to 30% for investments in “qualified rural opportunity funds.” Qualified rural opportunity funds will also benefit from a lower threshold for investment into an existing building to qualify for QOZ benefits.
- Taxable REIT subsidiaries: The bill raised the percentage of a real estate investment trust’s (REIT’s) assets that may be represented by taxable REIT subsidiaries from 20% to 25% for taxable years beginning after Dec. 31, 2025. The increased ability to hold taxable REIT subsidiary securities will provide REITs with incremental structuring flexibility while maintaining their favorable tax status.
- New markets and low-income housing tax credits: The OBBBA permanently extended the new markets tax credit, which was scheduled to expire at the end of 2025. It also expanded the availability of low-income housing tax credits, including a permanent increase in each state’s credit allocation.
- Section 199A: The Section 199A deduction for qualified business income (QBI), introduced by the TCJA, also achieved permanence with the OBBBA. The deduction was expanded modestly through an increase to the income limitation phase-in and the introduction of a small new minimum deduction for a taxpayer with aggregated QBI of at least $1,000 with respect to qualified trades or businesses in which the taxpayer materially participates.
Unchanged provisions
While the OBBBA made several significant tax law changes, it is also worth noting a few areas that were not impacted. In particular, the rules relating to the three-year required holding period for preferential long-term capital gain rates for carried interests remain unchanged and may still apply real estate developers.
Grant Thornton insight:
The rules excluding Section 1231 gains from recharacterization under the carried interest rules also remain intact, presenting a structuring opportunity when planning an exit from an investment.
Several other tax planning techniques used by real estate funds (among other taxpayers) also remain intact after the OBBBA. These include the use of management fee waivers, within certain parameters, and the availability of state pass-through entity tax regimes to increase the deductibility to state and local taxes with respect to partnership income. Tax-deferred exchanges of real estate under Section 1031 are also still available.
Finally, the OBBBA did not introduce any new limitations on the ability to qualify for the limited partner exception for self-employment tax based on state law designation as a limited partner, although this continues to be an area subject to significant IRS scrutiny and judicial activity.
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