Key Takeaways
- OBBB restores 100% bonus depreciation, expands Section 179 expensing, and introduces new incentives for domestic manufacturing and affordable housing.
- Several key tax benefits are permanent, while some clean energy credits are being phased out.
- A new overtime tax exemption allows workers to deduct up to $12,500 ($25,000 for couples) of overtime premium pay from taxable income for 2025–2028.
The One Big Beautiful Bill (OBBB) enacts many tax changes and extensions that will impact the real estate industry. Here’s what you need to know.
Restoration of Bonus Depreciation, Expanded Section 179 Expensing, and Qualified Production Property
One hundred percent bonus depreciation (for qualified property) is again restored under the OBBB for property acquired and placed in service after January 19, 2025. Previously, bonus deprecation had been subject to phase down limitations. Additionally, expensing under section 179 is increased to $2.5 million, with a phase-out threshold starting at $4 million.
The OBBB also creates a new category of property, called Qualified Production Property, eligible for full expensing. This provision generally incentivizes domestic manufacturing and factory production and will benefit businesses building or converting existing properties to production facilities.
Depreciation and Amortization Now Added Back for Interest Expense Limitation Purposes
The TCJA limited a business’s interest deduction to a formula equal to 30% of its Adjusted Taxable Income (ATI). Starting in 2022, ATI has been reduced by depreciation and amortization. This means a real estate business with large amounts of depreciation could have its interest expense limited. The OBBB permanently allows depreciation and amortization to be added back to the ATI calculation, relaxing business interest expense limitations for businesses with significant depreciation and amortization expenses.
Qualified Business Income Deduction Now Permanent
Under the TCJA, qualified business income (QBI) can be eligible for up to a 20% deduction, reducing the maximum federal tax rate for an active owner of a pass-through business from 37% to around 29.6%. Most income generated from a real estate business can be eligible for this QBI deduction, but this benefit was set to expire at the end of 2025. The OBBB now makes this QBI deduction permanent.
Opportunity Zones
The Opportunity Zones Tax Incentives Program (OZ Program), created by the TCJA, provides substantial tax benefits for qualified real estate investors, including gain deferral and exclusion. Originally set to expire after 2026, the OZ Program is now permanent under the OBBB and includes updated tax benefits for new investors.
New Accounting Methods for Residential Construction
The OBBB allows for a favorable accounting method, called the completed contract method of accounting, to apply to construction contracts for multi-family residential projects. Previously, this favorable method was limited to single-family home construction. This method allows taxpayers to defer recognizing revenue on eligible contracts until the projects are completed.
Phase Down of Energy Credits and Affordable Housing Credit Increases
Many of the clean energy credits introduced as part of the Inflation Reduction Act (IRA) are curtailed, phased down, or eliminated by the OBBB, including Section 179D and Section 45L, although current projects can be grandfathered. Still, future projects planned around the IRA tax credits or deductions may need to reassess project viability.
Other tax incentive programs related to housing are enhanced. The Low-Income Housing Tax Credit allocation is increased from 9% to 12%, and the New Markets Tax Credit is now permanent.
Overtime Tax Exemption
The OBBB introduces a major tax break for qualifying workers by exempting the overtime premium from their taxable income. Starting January 1, 2025, through the 2028 tax year, workers can deduct up to $12,500 (or $25,000 for married couples filing jointly) of qualified overtime pay from their federal taxable income.
This deduction applies only to the premium portion—the extra half-time pay above the regular rate—for hours worked beyond 40 in a week. It doesn’t directly eliminate tax withholding from your paycheck but reduces taxable income when you file.
Next Steps
The above provisions, except for the phase-down of the IRA energy credits, are favorable for the real estate industry. To take full advantage of these changes, real estate businesses should work with a knowledgeable professional to maximize potential savings opportunities.
We can help you understand what the new tax legislation means for your company.
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