From Bonus to Breakthrough: What the OBBB Means for Real Estate Tax Strategy

The One Big Beautiful Bill (OBBB), signed into law July 4, 2025, ushers in significant tax reform provisions that impact many aspects of U.S. tax policy. For the real estate industry, the bill brings both relief and opportunities. From a permanent QOZ regime to powerful depreciation tools, this legislation marks a pivotal moment for strategic tax planning in the industry.

QOZs: A New Chapter Begins in 2027

The current Qualified Opportunity Zone (QOZ) program sunsets at the end of 2026. While the OBBB does not change the capital gain recognition rules for existing QOZ investments, it launches a new and permanent QOZ regime beginning Jan. 1, 2027. Key takeaways include:

• Redesignation requirement: States must reselect QOZ tracts starting July 1, 2026, with Treasury certification required.
• Stricter designation metrics: Median family income thresholds for eligible zones drop to 70% of area medians (from 80%), and contiguous tracts are no longer eligible.
• Investment benefits:
  • Rolling five-year deferral: New capital gains can be deferred for five years, with a 10% basis step-up at the five-year mark.
  • Gain elimination after 30 years: The gain exclusion is frozen at the 30-year mark rather than requiring sale by a certain date.
• Rural QOZs get a boost: Investments in Rural Qualified Opportunity Funds receive:
  • 30% basis step-up after five years
  • A 50% substantial improvement test, instead of the standard 100%

Real estate investors and developers should begin planning now to position themselves for the 2027 rollout.

Bonus Depreciation: 100% Is Back

After a phasedown under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation is reinstated under OBBB for property acquired and placed in service after Jan. 19, 2025. This provision permits immediate expensing of a broad range of assets, including building systems, nonresidential interior improvements (Qualified Improvement Property), and other short-life assets often identified through cost segregation studies.

By eliminating the prior phase-down schedule and covering both new and used property, the OBBB introduces substantial flexibility for real estate investors and operators. This means real estate companies undertaking capital-intensive projects or renovation-heavy upgrades can now realize immediate deductions, effectively reducing taxable income, enhancing cash flow, and improving overall return on investment.

Section 163(j): EBITDA-Based Interest Deduction Limit Returns

OBBB makes a taxpayer-friendly modification by restoring the pre-2022 approach to computing adjusted taxable income (ATI) under Section 163(j):

• EBITDA-based ATI is back, meaning ATI is no longer reduced by depreciation and amortization.
• Effective for tax years beginning in 2025.

This change can improve the deductibility of business interest expense for leveraged real estate operations and partnerships heavily invested in depreciable assets that have not otherwise elected out of 163(j) limitations.

Completed Contract Method for Residential Construction: A Big Win for Developers

A boon for developers is the expansion of the completed contract method (CCM) for long-term residential construction under Section 460. Here’s what changed:

• High-rise condos and large multifamily projects (previously required to use the percentage-of-completion method, or PCM) are now eligible for CCM regardless of gross receipt amounts.
• Applies to contracts entered in tax years beginning after July 4, 2025.
• Small contractor exception extended to contracts up to three years in duration and for businesses with average annual receipts under $31 million.

Subcontractors may benefit, too. Based on IRS interpretation, specialty trades (e.g., electrical, HVAC, plumbing) may also qualify if 80%+ of costs are tied to eligible residential work. Benefits include:

• Deferral of income until substantial completion
• Simplified tax compliance—no more complex PCM look-back calculations
• Wider eligibility for both general and specialty contractors

Other Real Estate-Relevant Provisions

Beyond the headline changes, the OBBB includes several additional provisions that, while less prominent, carry meaningful implications for real estate businesses and investors.

• Energy efficient commercial building deduction (179D): The deduction terminates with respect to construction which begins after June 30, 2026.
• Net operating losses and excess business losses (EBL): Excess Business Loss limitation is now permanent, and carryover losses continue converting to NOLs in the carryover year.
• Estate tax exemption: Permanently set at $15 million per individual starting in 2026, indexed for inflation. Provides more flexibility for real estate owners focused on generational planning.
• Pass-through entity tax (PTET): Continued popularity is likely, especially since OBBB didn’t significantly modify federal treatment. States may expand PTET options as planning strategies.
• Qualified business income (QBI) deduction: The 20% deduction under Section 199A is permanently extended, offering certainty for real estate owners and operators structured as pass-through entities.
• Section 179 expensing limits: Increased to $2.5M, with phaseout beginning at $4M, for property placed in service after 2024.
• Qualified Production Property (QPP): A new category of nonresidential real estate eligible for 100% bonus depreciation was created for certain manufacturing properties. This new category of property is subject to limitations, including being inapplicable to lessors.

Next Steps: Positioning for Opportunity

The OBBB offers a wide range of enhancements, clarifications, and permanent extensions that can be transformative for real estate businesses. From cost recovery acceleration and simplified income recognition to long-term estate planning strategies and new investment vehicles, the time to align your tax strategy with the new law is now.

For personalized guidance on how OBBB impacts your specific projects or investments, reach out to your KSM advisor today or fill out the form below.