The One, Big, Beautiful Bill Act (OBBB) that was signed into law on July 4, 2025, includes a variety of provisions that will directly affect the real estate and construction industries, as well as several provisions targeted more broadly at businesses and individuals that will have a carryover effect on related sectors. Businesses are still in the early stages of understanding and evaluating the details and the impact that these changes will have on their operations, but here’s a quick overview of some of the modifications in the new law that could affect taxpayers with real estate and construction interests.
OBBB makes opportunity zones a permanent part of the tax code
Opportunity zones (OZs) are now a permanent fixture of the Internal Revenue Code. However, investors will need to contend with two sets of rules, depending on the timing of their investment into OZs.
- The original OZ rules, as created in the Tax Cuts and Jobs Act (TCJA), apply to OZ investments made through the end of 2026. The end of 2026 also triggers the end of the original OZ gain deferral period and the designation of census tracts as OZs.
- The new OZ rules, as modified by the OBBB, will then take effect on Jan. 1, 2027. Changes will include updated census tract designations as OZs (to be designated on a rolling 10-year basis), implementation of a new five-year gain deferral period, and modified basis step-up rules. Notably, the general 10% basis step-up increases to 30% for qualified rural funds.
The OBBB will also narrow the definition of “qualifying zones.” The threshold for being designated “low-income” was decreased from 80% of relevant median income to 70%, and the provision in the TCJA version of the program that allowed OZ treatment for tracts contiguous to low-income communities was eliminated.
OBBB modifies several real estate credits
The OBBB permanently increases the low-income housing tax credit’s state allocation ceiling from 9 to 12%. Additionally, the new law lowers the bond-financing threshold from 50 to 25%, which could lead to an increase in the number of affordable homes available on the market.
The OBBB permanently extended the New Markets Tax Credit that had been scheduled to expire at the end of 2025.
Several credits that had generated interest and activity in the real estate and construction sectors in recent years will be phased out over an elongated period due to the OBBB. Tax credits for renewable energy production were previously expanded by the Inflation Reduction Act. Moving forward, tax credits related to wind and solar property will begin to phase out for projects placed in service after 2027. However, it’s notable that: (1) that phase out is limited to wind and solar property, and (2) a beginning of construction (BOC) safe harbor will allow for qualifying wind and solar projects to be placed in service well after 2027. These rules are complex, with varying BOC dates triggering different tax rules, so interested taxpayers should carefully consider the timing of projects.
The Section 179D deduction available to building owners who improved the energy efficiency of commercial buildings will be terminating for construction projections beginning after June 30, 2026.
Other real estate provisions in the OBBB
The OBBB repeals the percentage of completion-capitalized cost method (PCCM) for residential construction contracts, allowing more flexibility in accounting methods. The new law’s repeal of PCCM allows residential construction contracts and home construction contracts to be combined so that all such contracts can be accounted for under any method available to the taxpayer. Prior to OBBB, only small business taxpayers were eligible for exclusion from PCCM. This choice in method applies to contracts entered into after the date of enactment, with no AMT addback. Contracts would be on a cutoff basis and need to be under three years to complete versus the old law requirement of two years.
Any businesses that move away from the PCCM will likely need to work with their tax advisor to file a change in accounting method with the IRS. Future guidance from regulators may provide additional insights on this process, possibly even an automatic change method. Some businesses may benefit from the switch, as the completed contract method may allow for more effective deferral of income recognition to later tax years completed contract method may allow for more effective deferral of income recognition to later tax years.
The new law increased the Taxable REIT Subsidiary (TRS) securities asset limit from 20 to 25% of total value of assets owned by a REIT. This change may result in greater liquidity and more financial flexibility for these entities.
The OBBB also extended the exempt facility bond category to include spaceports. These bonds are a type of tax-exempt private activity bond used to finance specific types of public infrastructure projects, whereby the investors are generally not taxed on interest received. The bill would include bonds issued by state and local governments to fund the construction of spaceports in this exemption.
OBBB business tax changes that will affect real estate and construction
Bonus depreciation is back at 100% on a permanent basis. Importantly, this restoration applies to property that’s acquired after Jan. 19, 2025. The new law also extends a kind of bonus depreciation to qualified production property that’s used as an integral part of a taxpayer’s qualified production activity, such as manufacturing, production, or refining of tangible personal property.
The Inauguration Day effective date might cause some headaches with determining project start dates similar to those experienced with the implementation of the TCJA. Taxpayers and their advisors will need to carefully review construction agreements and invoice dates to document the actual starting dates of affected projects. More guidance is expected from the IRS on how to handle the nuances of the timing if a project was under contract or started prior to the Jan. 19, 2025, effective date.
Section 179 expensing also sees a major boost, with the deduction limit doubling to $2.5 million and the asset acquisition limit increasing from the current $3,130,000 to $4,000,000. This will increase the point at which the full deduction phases out from $4,380,000 of asset purchases to $6,500,000 of asset purchases. Section 179 is eligible for tangible personal property, qualified improvement property, and specified property including roofs, HVAC, security systems, and fire protection systems. This increase will benefit most businesses, but rental real estate entities may face challenges in qualifying for the deduction. Asset purchases that may qualify for the deduction should be discussed with a tax advisor.
The combined benefit of 100% bonus depreciation and Section 179 expensing can have an immense impact on taxpayers as they not only get the full benefit of the cash outlay but also get an increase to their unadjusted basis in assets (UBIA) threshold for qualified business income deduction (QBID) purposes.
The increased ability to take immediate deductions on certain high-value components of buildings only amplifies the current benefit of performing cost segregation studies on new building purchases or developments that are eligible.
Multistate taxpayers will want to make sure they are keeping state/local conformity in mind when deciding whether to take advantage of these advanced deduction options.
The interest expense limitation under Section 163(j) is largely restored to its original form, allowing add-backs for depreciation, amortization, and depletion when calculating adjusted taxable income. This change will increase the availability of business interest expense deductions and applies to tax years beginning after Dec. 31, 2024, (e.g., beginning on Jan. 1, 2025, for calendar year taxpayers). However, the OBBB also made a prospective change that will tighten the Section 163(j) limitation in certain cases. Specifically, a new ordering rule provides that the calculation is performed before application of any elective interest capitalization under Section 263(a) or Section 266. This change takes effect for tax years beginning after Dec. 31, 2025, and will preclude elective capitalization from circumventing Section 163(j). Importantly, this ordering rule doesn’t impact required capitalization under Section 263(g) or Section 263A(f).
The changes made to Section 163(j) by the OBBB provide a great opportunity to revisit calculations and consider planning opportunities. This includes consideration of opportunities to make or forgo the real property trade or business (RPTOB) election or for the business to become exempt from Section 163(j) as a small business taxpayer. Other tax depreciation and amortization rules should also be evaluated given their interaction with the calculation of adjusted taxable income.
OBBB individual tax changes that may affect real estate investors
The OBBB permanently extended Internal Revenue Code 461(l) that generally disallowed annual net business losses of noncorporate taxpayers in excess of $250,000, and it extended certain alternative minimum tax exemptions. The new law did make some modifications to the provisions, though.
First, it resets the 461(l) limitation and AMT exemption to the level initially established by the TCJA, removing all inflation adjustments that have occurred over the past several years, returning the:
- 461(l) limitation from the 2025 inflation-adjusted $313,000 (single) and $626,000 (joint) to $250,000 (single) and $500,000 (joint) in 2026.
- 2025 AMT phase-out threshold from $626,350 (single) and $1,252,700 (joint) to $500,000 (single) and $1,000,000 (joint), in 2026.
Inflation adjustments will begin again starting in 2027. Second, the AMT phase-out will occur twice as quickly once the thresholds are exceeded.
The TCJA temporarily suspended the overall limitation on itemized deductions, commonly known as the “Pease limitation.” The OBBB replaced the Pease limitation with a cap on the benefit of an itemized deduction to 35% for taxpayers in the 37% tax brackets. This is accomplished by reducing by 2/37ths the lesser of:
- The total value of those itemized deductions.
- The amount of taxable income in excess of the 37% bracket.
More information to come for real estate and construction regarding OBBB
For businesses in this sector, these changes typically mean more generous deductions, improved cash flow, and greater flexibility in financing and expansion. Construction contracts and timing will play a pivotal role on what deductions, credits, and investment opportunities are available. While some of the OBBB is retroactive to the start of 2025, there are pieces that have a delayed effective date to 2026 or even 2027. Affected taxpayers should be working closely with their advisors to determine how these changes affect their specific circumstances given the information currently available and as new guidance is released. Beyond the significance of the changes in federal law, it’s always important to note that affected taxpayers need to be monitoring state conformity with these new changes in every jurisdiction where they are required to pay taxes.
As for individuals with investments and holdings in real estate and construction, the changes to 461(l), AMT and itemized deductions also create new planning opportunities, especially for those in the top tax brackets. OZ investment opportunities might look different after the new provisions take effect in 2027, so timing could play a critical part in maximizing the tax benefit of this incentive. While OBBB thankfully included no major changes to state pass-through entity tax workarounds, individual taxpayers, like their business counterparts, will still need to work with their tax advisors to closely monitor state conformity with the new tax law.
To learn more about the changes that the OBBB made in the real estate and construction sector and how those changes could affect your businesses and investments, please consult with your tax advisor about the impact of the modifications on your specific circumstances.
Timeline of effective dates
2025
- Section 179 expansion
- Research & Development 174 expenditures
- 100% bonus depreciation – Jan. 19, 2025
- Percentage-of-completion capitalized cost method (PCCM) repealed – July 4, 2025
- State and local tax deduction cap – 2025-2029
2026
- Qualified business income deduction (QBID) changes
- Section 163(j) ordering
- Alternative minimum tax (AMT) changes
- 461(l) reset
- Itemized deduction 35%
- Low-income housing tax credit (LIHTC) changes
- REIT asset test
- Spaceport exempt facility bonds
- 179D energy efficient commercial buildings deduction terminating – June 30, 2026
2027
- Opportunity zone 2.0
- Wind/Solar 45Y production tax credit (PTC) & 48E investment tax credit (ITC) phaseouts
