Big Beautiful Bill: What to Watch Out For
As the Federal budget bill nears the finish line, real estate will gain more than lose.
On May 22, the U.S. House of Representatives narrowly passed a comprehensive reconciliation bill, H.R. 1—called the One Big Beautiful Bill Act—that includes significant proposed tax changes and spending cuts. While the bill faces further debate and revisions in the Senate, real estate businesses, developers and investors should take note of several tax provisions that, if enacted, could significantly impact real estate financial decisions. Following is a quick rundown of some of the key proposed tax changes to be aware of.
Passthrough deduction: Increases the Internal Revenue Code Section 199A qualified business income deduction for passthrough entities from 20 percent to 23 percent for tax years starting after Dec. 31, 2025, makes the deduction permanent, and modifies the income limitations.
Bonus depreciation: Temporarily restores 100 percent bonus depreciation for qualifying
property placed in service after Jan. 19, 2025, and before January 1, 2030.
Business interest expense limitation: Returns to earnings before interest, taxes, depreciation, and amortization-based interest expense limitation for tax years beginning after Dec. 31, 2024, allowing the addback of depreciation and amortization, generally increasing the amount of allowable interest expense deduction.
Special depreciation allowance for qualified production property: Temporarily provides an immediate deduction of 100 percent of qualifying real property used in the manufacturing, production, or refining of a qualified product in which construction begins after Jan. 19, 2025, and before Jan. 1, 2029, and is placed in service before 2033.
Research and development expenditures: Temporarily restores immediate expensing
of domestic research and experimental expenditures paid or incurred in tax years beginning after Dec. 31, 2024, and before Jan. 1, 2030.
Clean energy tax credits and incentives: Significantly accelerates the expiration of clean energy tax credits and incentives.
Pass-through entity tax deduction: Disallows the deduction for state and local income taxes paid at the entity level by a pass-through entity for specified service trades or businesses, effectively eliminating the benefit for these types of service businesses.
Opportunity zones: Renewal and modification of the opportunity zone program.
Tax rates: Makes the Tax Cuts and Jobs Act individual income tax rates permanent, with the highest individual income tax rate of 37 percent.
State and local tax deduction: Increases the itemized deduction limit for state and local taxes for 2025 to $40,000 and $40,400 beginning in 2026. The deduction phases down by 30 percent of the excess income over a threshold—$500,000 for 2025 and $505,000 after 2025—not to be reduced below $10,000.
READ ALSO: All Eyes Fixed on Federal Housing Proposals
Here are some additional insights for real estate professionals:
Cost segregation strategy: The potential return of 100 percent bonus depreciation could justify utilizing cost segregation studies to accelerate depreciation for recent acquisitions or upcoming development projects.
Construction timeline planning: Bonus depreciation and manufacturing-related expensing provisions both include in service date or construction start date deadlines, potentially incentivizing real estate developers to adjust their timelines.
Energy credits sunset planning: Developers using IRC Section 45L credits should evaluate project timing and budget to understand the potential impacts of the proposed law change.
Provision 899 Enforcement of Remedies Against “Unfair Foreign Taxes: At the request of Treasury Secretary Scott Bessent, this provision, which would have imposed new increased tax rates on certain foreign companies and individual residents of countries with “unfair foreign tax,” has been removed from the Senate version of the bill.
As the Senate debates and revises the bill, real estate stakeholders should monitor developments closely and work with their tax advisors to model the potential tax outcomes across different scenarios.
Tito Garcia is tax managing principal at Baker Tilly. Laura Theiss is tax principal.
