The real estate and construction sector has been feeling the squeeze—from rising construction costs and labor shortages to inflation and higher interest rates. At the same time, recent federal tax changes have reshaped the landscape. The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, had a significant impact on several federal tax provisions affecting real estate. Key incentives have been extended, expanded, or made permanent, creating a window of opportunity for tax-efficient planning.
Although you can’t provide tax or financial advice without the right credentials, you can be well-versed enough to help you and your clients prioritize strategies that leverage these new provisions to improve cash flow, enhance resilience and support long-term growth. The opportunities are especially strong in energy-efficient construction, qualified opportunity zones and accelerated depreciation.
Unlock Cash Flow Through Accelerated Deductions
One of the most effective ways to reduce taxable income is by accelerating deductions through cost segregation, bonus depreciation and the Section 179D energy efficiency deduction.
Bonus depreciation allows a taxpayer to deduct a large percentage of the cost of certain assets in the year they are placed into service rather than spreading that depreciation over several years. Governed by Section 168(k) of the Internal Revenue Code, it currently applies to new or used assets (as long as they’re new to the taxpayer) with a useful life of 20 years or less.
For real estate investors, bonus depreciation generally applies to items identified as personal property and land improvements, such as:
- Parking, roadway, sidewalk and curb paving
- Stormwater management systems
- Irrigation systems
- Fences, decks and retaining walls
- Certain landscaping components and recreational amenities
- Furniture, fixtures, flooring and window treatments
- Signs
- A/V and communication systems, and some components of electrical systems
- Appliances, countertops and cabinets
The 2017 Tax Cuts and Jobs Act (TCJA) expanded bonus depreciation and allowed it to apply to acquired used property. For properties placed in service from Jan. 1, 2025, to Jan. 19, 2025, and those under contract or being built before Jan. 19, 2025, but placed in service after Jan. 19, 2025, a taxpayer could deduct 40% of the value of an eligible asset. However, under the new OBBBA, 100% depreciation is restored for qualifying property placed into service after Jan. 19, 2025, and before Jan. 1, 2031. To qualify, construction must begin between Jan. 20, 2025, and Dec. 31, 2029.
To maximize bonus depreciation, real estate investors should consider engaging professionals to conduct a cost segregation study. This study follows IRS guidelines to allocate costs from construction or acquisition into classes—such as long-life real property, personal property and bonus-depreciable property—and includes documentation to support these classifications.
Real estate investors should also consider whether properties can benefit from the Section 179D deduction for energy-efficient commercial buildings—which includes multifamily buildings that are four stories or more. This deduction offsets costs associated with implementing energy-efficient technologies in commercial buildings. The OBBBA phases out this incentive for projects beginning construction after June 30, 2026. For buildings placed into service after Dec. 31, 2022, this deduction can be worth up to $5.80 per square foot. A Section 179D study is required to determine eligibility to claim this deduction.
Structure Transactions to Defer Taxes
Commercial real estate professionals are very familiar with a common strategy for deferring a taxable gain from a property sale: the 1031, or like-kind, exchange.
But another way to defer taxes on capital gains is by reinvesting proceeds into a Qualified Opportunity Fund (QOF), which supports projects in distressed areas through the Opportunity Zone (OZ) program.
Under the current OZ program, which ends in 2026, deferred gains are taxable only upon sale or by Dec. 31, 2026 (whichever comes first). In addition, appreciation from a QOF investment held for at least 10 years is excluded from federal taxable income. The OBBBA makes the Opportunity Zone program permanent and introduces additional features starting in 2027, including:
- Rolling deferral periods and basis step-ups every five years (10% standard; 30% for rural zones). The rules allow one step-up per asset, not stacked step-ups.
- Permanent exclusion of gains after a 10-year holding period remains.
- Introduction of “qualified rural opportunity funds” offering enhanced tax benefits for investments in rural census tracts (population less than 50,000). Investments in rural OZ funds require only a 50% substantial improvement threshold (versus 100% for other OZ funds). In addition, rural OZ investors get a 30% basis step after five years versus 10%.
- Increased compliance and annual reporting requirements for QOFs.
In addition to bonus depreciation and QOF gains deferrals, another favorable tax provision is the permanent extension and improvement of the qualified business income (QBI) deduction.
With so many favorable tax provisions either extended or made permanent under OBBBA, tax planning strategies have shifted from racing against expiration dates to identifying how best to capitalize on longer-term incentives. Speak with your tax adviser to see how to time your investments and transactions to align planning with the new rules.
Timing also plays a role in basic tax strategies, such as holding property for more than a year to qualify for long-term capital gains treatment, rather than being taxed at the higher ordinary income rates.
In addition, investors considering parceling out and selling land they’ve been holding should plan carefully to avoid being considered a dealer in property, with gains taxed as ordinary income. If certain requirements are met, those gains could be treated as capital gains for tax purposes.
Keep Other Tax Policy Changes on Your Radar
Several key provisions changed by the OBBBA had already been enacted but should now be considered in your planning:
- Business interest deduction now calculated using EBITDA (vs. EBIT), effective for tax years beginning after Dec. 31, 2024. EBITDA refers to earnings before interest, tax, depreciation and amortization; EBIT refers to earnings before interest and tax only. This generally allows higher interest deductions for real estate businesses compared to prior years.
- Estate tax exemption increases to $15 million per person ($30 million per couple) beginning in 2026, permanently indexed for inflation.
- Section 179 expensing limit increased to $2.5 million, with phaseout starting at $4 million. The expensing limits are indexed for inflation in future years.
- Income recognition on condos (IRC 460—Long-term contracts)—Condos are now eligible to use the completed contract method (CCM) instead of percentage of completion (PCM). This means that income can be deferred on units until they are closed as opposed to as construction progresses. Condos are eligible for CCM if they are entered in tax years beginning after July 4, 2025. This effectively means that for calendar year taxpayers, CCM will not be able to be utilized until 2026.
Understand State and Local Property and Income Tax Opportunities
Whether you’re advising clients or managing your own portfolio of properties, be sure you work with professionals who are versed in applicable state and local property and income taxes. This includes structuring real estate funds to separate non-tax and taxable states or planning for allocation of income and tax liabilities.
The recent increase in the state and local tax (SALT) deduction cap may also influence state-level PTET (Pass-Through Entity Tax) elections, an area that requires careful review on a state-by-state basis. With a valid state PTET deduction, a taxpayer can pay at the pass-through level and take a business deduction, rather than running the tax through Schedule A and most likely hitting a limitation.
Stay Flexible and Plan Smart
In a time of rising costs and with new federal legislation in effect, proactive planning is more important than ever to protect cash flow and profitability for commercial real estate investments. The key is collaboration—bringing together your team of tax, finance, accounting and investment professionals to map out a strategy that works. By doing this, you can align your tax strategy with investment planning to protect returns in today’s environment, and plan transactions and entity structures around evolving tax rules. In this new tax landscape, the right planning can set you and your clients up for long-term success.