The 2025 Budget Reconciliation Bill, also known as the One Big Beautiful Bill Act (OBBB Act or Bill), extends key tax provisions from the Tax Cuts and Jobs Act (TCJA) and introduces new provisions that impact commercial real estate (CRE) companies. The OBBB Act preserves marginal tax rates for ordinary income and capital gains and maintains the deduction for pass-through business income. It also preserves favorable tax treatment for carried interests and allows real estate businesses to deduct state and local taxes on pass-through income via the PTET regime. Moreover, the Bill contains key taxpayer-friendly changes related to bonus depreciation, business interest expense, and opportunity zones. Given the new tax landscape, real estate businesses may benefit from reevaluating their tax strategies for 2025 and beyond. 

Bonus depreciation  

 
Under prior law, bonus depreciation of qualifying assets was limited to 40% expensing in 2025 and was scheduled to decrease to 20% in 2026 and expire in 2027. Under the new law, bonus depreciation is permanently set at 100% for qualifying assets placed in service after Jan. 19, 2025.

Real estate assets that qualify for bonus depreciation include tangible personal property with a recovery period of 20 years or less, such as furniture, fixtures, equipment, and qualified improvement property, which are defined in the Internal Revenue Code (IRC) as improvements made to the interior of a nonresidential building. In addition, certain tenant improvements and land improvements qualify. Assets that do not qualify include land, building, building improvements, and intangible assets such as mortgage origination costs and leasing commissions. 

CR insight: For tax year 2025, qualifying assets acquired and placed in service on or before Jan. 19 are still subject to the lower 40% expensing limit, so taxpayers should be aware of the acquisition/placed in-service date for 2025 purchases when bonus depreciation is desired. Taxpayers can still opt-out of bonus depreciation via an election, which is often made to avoid an addback for state income tax purposes in jurisdictions that decouple from the federal tax rules. Aside from a state addback and possible recapture of income in the case of short-term held assets, real estate companies will generally benefit from the increased bonus depreciation allowance.

IRC Section 163(j) Business interest expense 

As a result of the 2017 Tax Cuts and Jobs Act (TCJA), the amount of a taxpayer’s deductible business interest expense in a tax year cannot exceed the sum of (1) the taxpayer’s business interest income; (2) 30% of the taxpayer’s adjusted taxable income (ATI); and (3) the taxpayer’s floor plan financing interest expense. After 2021, deductions for depreciation, amortization, or depletion were not permitted to be added back to taxable income for purposes of computing ATI. 

The OBBB Act modifies ATI’s definition to add back for depreciation, amortization, or depletion to taxable income for purposes of computing ATI effective Jan. 1, 2025, thus raising the limit for the business interest deductibility. 

While small business taxpayers that meet an annual gross receipt test for the three prior years ($30 million for 2024 and $31 million for 2025) are generally exempt from this limitation, taxpayers can fall into tax shelter rules from losses that are allocated to limited partners and become ineligible for the exemption. (See Sections 448(d)(3), 461(i)(3)(B), and 1256(e)(3)(B).) 

Real estate businesses that are unable to qualify as a small business can make an opt-out election as a real property trade or business (RPTB). Section 163(j)(7)(B) refers to electing real property trade or business as any trade or business described in Section 469(c)(7)(C), which includes “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, lease, or brokerage trade or business.” 

While the election is irrevocable and causes certain real estate assets – such as nonresidential real property, residential rental property, and qualified improvement property – to be depreciated using the longer alternative depreciation system (ADS) method (with no bonus depreciation permitted), the tax benefit of taking the interest expense deduction when considerable may outweigh the depreciation limitation. 

CR insight: By increasing the cap on the deductibility of business interest expense, some real estate companies, especially partnerships with active partners, may not need to make the RPTB opt-out election, which would have the effect of limiting tax depreciation. However, for real estate partnerships with significant limited partners, the tax shelter rules will often still prevent those partnerships from qualifying as a small business taxpayer and require those partnerships to opt-out as a RPTB to fully deduct business interest expense. Moreover, the OBBB Act does not change or revoke any existing RPTB elections. The RPTB election to opt-out is still irrevocable absent special relief by the IRS.

IRC Section 179 expensing 

Previously under Section 179, small businesses could expense up to an inflation-adjusted $1 million of qualified depreciable property subject to an inflation-adjusted phase-out limit of $2.5 million. The new law states the maximum amount a taxpayer can expense pursuant to a Section 179 election is permanently increased to $2.5 million subject to a reduction in limitation starting at $4 million of qualifying property beginning after Dec. 31, 2024. Both the deduction limit and phase-out figures are adjusted for inflation after 2025. Section 179 qualifying assets include tangible personal property, such as office equipment, as well as qualified real property, defined as any qualified improvement property and certain improvements to nonresidential real property (roofs, HVAC property, fire protection, and security systems). 

In general, the Section 179 election is used by small companies because of the limitations, which cause the deduction to be reduced, dollar for dollar, when qualifying property placed in service exceeds the phase-out amount. For instance, the inflation-adjusted expense ceiling and phase-out amounts in 2024 were $1,220,000 and $3,050,000, respectively, under Rev. Proc. 2023-34. Under these limitations, if the taxpayer incurred capital expenditures of $1,000,000 in qualified improvement property during the 2024 tax year and made no other qualifying purchases in 2024, the taxpayer may elect to deduct the entire $1,000,000 under Section 179. If, however, the taxpayer incurred an additional $2.5 million of qualifying property in 2024, totaling $3.5 million, the amount deductible would be reduced by the excess of the cost of qualifying property $3,500,000 over the $3,050,000. Accordingly, the deduction is reduced by $450,000 and becomes $770,000 ($1,220,000 – ($3,500,000 - $3,050,000)). 

For partnerships and S corporations, the dollar limitation applies both with respect to the pass-through entity and each partner and shareholder. Thus, in the case of a partnership, both the entity and the partner are subject to the annual dollar limitation. In general, the amount allowable under Section 179 cannot exceed the taxable income from any active trade or business of the taxpayer for the taxable year, and trusts and estates are not eligible. However, unused amounts can be carried forward. 

CR insight: This change allows small operating real estate companies to deduct the full cost of qualifying assets, but state tax treatment of Section 179 varies, so state income tax implications should be considered. Because changes apply to qualifying assets placed in service after Dec. 31, 2024, Section 179 qualifying assets placed in service between Jan. 1 to Jan. 19, 2025, can be fully deducted. However, with the increased bonus depreciation for qualifying assets placed in service after Jan. 19, 2025, and the limitations of Section 179, many real estate companies will still likely take bonus depreciation over Section 179 to seek full expensing at the federal level. 

Factory expensing

A new subsection was added (Section 168(n)), to allow 100% expensing for qualified production property, defined as:

• Any nonresidential real property which is used by the taxpayer as an integral part of a qualified production activity;
• Placed in service in the U.S. or any possession of the U.S.;
• The original use commences with the taxpayer; 
• The construction begins after Jan. 19, 2025, and before Jan. 1, 2029; 
• Designated by the taxpayer in an election under Section 168(n); and
• Placed in service before Jan. 1, 2031. 

The term “qualified production activity” means the manufacturing, production, or refining of a qualified product. The activities of any taxpayer do not constitute manufacturing, production, or refining of a qualified product unless the activities of such taxpayer result in a substantial transformation of the property comprising the product. The rule further clarifies that in the case of property with respect to which the taxpayer is a lessor, property used by the lessee shall not be considered to be used by the taxpayer as part of a qualified production activity. 

CR insight: Due to the use requirement set forth in new subsection (n) of Section 168, real estate companies will not benefit unless they are also engaged in qualified production activities. Auto manufacturers and other manufacturing companies that intend to build or acquire factories in the U.S. will probably be the prime beneficiaries of this new 100% expensing rule.

Tax accounting for condominium construction 

Previously, many condominium developers used the percentage of completion method of accounting or the percentage of completion capitalized cost method of accounting to recognize income, in whole or in part, as work progresses instead of waiting until completion. Effective for long-term contracts entered into after July 4, 2025, all “residential construction contracts” are exempt from using the percentage of completion method along with previously exempt home construction contracts (defined as a building containing four or fewer dwelling units) and construction contracts performed by small contractors (qualifying as a small business taxpayer). Accordingly, condominium developers can now use the completed contract method of accounting to defer income until completion. This will likely help developers avoid phantom income and make financing easier for large development projects. 

Qualified Opportunity Zones   

The new law significantly modifies the Qualified Opportunity Zone (QOZ) rules by making the rules permanent and by renewing the exclusion of taxable income on the disposition of qualifying investments when held for at least 10 years. Under the QOZ rules, opportunity zone census tracts will be re-designated by States beginning July 1, 2026, and every 10 years thereafter. 
For qualifying investments made after Dec. 31, 2026, a new five-year deferral period will be available for capital gains invested in a Qualified Opportunity Fund (QOF). The deferral of gain invested will be includable in income the earlier of (i) the date on which the investment is sold or exchanged, or (ii) the date which is five years after the date the investment in the QOF is made. 

Qualifying investments held in a QOF after five years are also eligible for a 10% basis step-up and an enhanced 30% basis step-up is available in the case of any qualifying investment in a Qualified Rural Opportunity Fund (QROF). 

The term QROF means a qualified opportunity fund that holds at least 90% of its assets in qualified opportunity zone property, which is 

• (i) qualified opportunity zone business property substantially all of the use of which (during substantially all of the fund’s holding period for such property) was in a qualified opportunity zone comprised entirely of a rural area, or
• (ii) is qualified opportunity zone stock, or a qualified opportunity zone partnership interest, in qualified opportunity zone business in which substantially all of the tangible property owned or leased is qualified opportunity zone business property, and substantially all of the use of which is in a qualified opportunity zone, comprised entirely of a rural area.  

Rural area is defined as any area other than a city or town that has a population of greater than 50,000 inhabitants, and any urbanized area contiguous and adjacent to a city or town that has a population greater than 50,000. Qualifying investments in designated rural areas will be subject to a lower substantial improvement threshold of 50% of the adjusted basis for existing properties. 

New increased reporting requirements for QOF and QROFs are established in the Bill along with penalties for failure to comply. However, despite the increased compliance and tightened QOZ designation standards set forth in the Bill, the permanence of the bipartisan QOZ program and the additional tax incentives will likely increase investment activities. 

Taxable REIT Subsidiary   

The OBBB Act changes the Taxable REIT Subsidiary (TRS) rule in Section 856(c)(B)(ii) by amending the limitation on the value of TRS securities that a Real Estate Investment Trust (REIT) can own from 20% to 25% of the REIT’s total value of assets. This change, effective for tax years beginning in 2026, provides REITs with additional flexibility to use TRSs for activities that are typically not allowed by the REIT itself. 

Phase-out of clean energy tax incentives   

Several clean energy tax incentives will sunset, including the IRC Section 45L tax credits for homebuilders of energy efficient homes, and the IRC Section 179D deduction for energy-efficient commercial buildings. The Section 45L tax credits expire for homes acquired after June 30, 2026, and the Section 179D deduction expires for construction of commercial buildings beginning after June 30, 2026. 

The OBBB Act also terminates Section 48E investment tax credits for wind and solar facilities. No investment tax credit will be available to any qualified property placed in service by the taxpayer after Dec. 31, 2027, with the exception of projects that begin construction within 12 months of July 4, 2025. 

Takeaways: What should you do?

The 2025 Budget Reconciliation Bill introduces changes that present both opportunities and complexities for commercial real estate companies. From enhanced bonus depreciation and expanded Section 179 expensing to interest deductibility and opportunity zones, these provisions can impact your tax position and strategic planning. If you are a CRE company, speak to your tax advisor about the new tax law changes to maximize tax benefits.