Earlier this year, the One Big Beautiful Bill Act (OBBBA) was signed into law, extending or enhancing many of the favorable tax provisions from the Tax Cuts and Jobs Act (TCJA) of 2017. The legislation is generally beneficial for the real estate sector and further enhances after-tax returns for private real estate partnerships.
Qualified Business Income Made Permanent
The Qualified Business Income (QBI) deduction known as Section 199A has been made permanent. This allows eligible pass-through entities such as S corps, partnerships, and sole proprietors to deduct up to 20% of their QBI from taxable income. A portion of the income distributed to a limited partner (LP) from rental operations of an apartment can be considered QBI, meaning the primary benefit is a lower effective tax rate on their investment returns. Investors with higher taxable incomes are subject to limitations in how much QBI deduction they can claim.
100% Bonus Depreciation Reinstated
Under the TCJA, 100% bonus depreciation was on a phasedown schedule and was set at 40% for the 2025 tax year. The 2025 tax reform permanently reinstated 100% bonus depreciation for qualifying assets placed in service on or after January 20, 2025. Bonus depreciation allows businesses to immediately deduct a large percentage of the purchase price of eligible assets, rather than depreciating them over the useful life of the asset. In practical terms for private real estate, bonus depreciation generates a significant paper loss that can be used to offset taxable income from rental operations and enhances near-term cash flow. Bonus depreciation can be paired with cost segregation studies, which identifies building components such as wiring, flooring, and plumbing, that legally qualify for shorter depreciable lives. With 100% bonus depreciation, the entire cost of these shorter-lived assets can be written off in the first year.
Opportunity Zone Program Enhanced
The Opportunity Zone (OZ) program encourages investments in economically distressed communities by providing tax benefits including the deferral and reduction of capital gains. The OZ program was set to expire for new investments at the end of 2026, but now has been made permanent with new benefits. Investments made after January 1, 2027 can defer gains for five years from the date of investment and utilize a 10% basis step-up after five years. A new benefit as part of the enhanced program allows a property’s basis to be stepped up to its fair market value at that time after 30 years of investment, without requiring a sale.
The current OZ census tracts will expire at the end of 2026 and new tracts will be designated with new requirements including a poverty rate of at least 20%.
Estate Tax Exemption Increase
The 2025 tax reform permanently increased the federal estate tax exemption, which is the amount of assets a person can leave to their heirs without incurring this tax. Beginning in 2026, the exemption amounts increase to $15 million per individual or $30 million per couple. For investors, this increased exemption provides greater flexibility in their estate planning and removes the urgency to transfer ownership interests in real estate, which often constitutes the most valuable asset in an estate.
