How the One Big Beautiful Bill Act Impacts the Real Estate Industry

The One Big Beautiful Bill Act (OBBBA) brings some of the biggest tax shifts the real estate industry has seen in years, and understanding these changes now can be a significant advantage later. In this article, we’ll walk through what’s new, why it matters and how these updates could shape your investment strategy.

Bonus Depreciation

Under the Tax Cuts and Jobs Act of 2017, bonus depreciation was set to sunset, decreasing by 20% each year until it expired. That trend has now reversed, and the OBBBA has permanently restored 100% bonus depreciation.

This update is a major advantage for real estate investors. Bringing back 100% bonus depreciation means you can deduct the full cost of qualifying assets right away, rather than spreading it out over years. That accelerates tax benefits and improves cash flow, which is critical for planning and deal structuring in the real estate industry.

Because this provision is now permanent (at least as permanent as tax law ever is) it’s a good time to revisit your long-term planning. Real estate investors can now evaluate future acquisitions and cost segregation opportunities without the pressure of an approaching deadline.

Qualified Production Property

Another provision that’s been raising questions from real estate investors is qualified production property. Many have asked whether this new incentive could apply to their projects. (And it’s easy to see why. It allows certain property to qualify for bonus depreciation.)

However, the rule is written towards manufacturers who build and operate facilities, not for typical real estate leasing arrangements. In fact, the law specifically excludes lessor-lessee relationships. Regulations are still pending, so there’s a chance for clarification, but for now, this incentive is squarely aimed at manufacturing companies.

But that doesn’t mean real estate is completely out of the picture. If you’re a developer working with manufacturing clients, this could open doors for new projects.

Business Interest Expense Limitation

The business interest expense limitation under Section 163(j) also saw changes under the OBBBA. Originally introduced in the Tax Cuts and Jobs Act of 2017, this rule limits interest deductions based on adjusted taxable income. Over time, depreciation and amortization were excluded from the calculation, reducing allowable deductions.

The new law allows depreciation and amortization to be added back, increasing the amount of deductible interest (especially for those who don’t elect real property trade or business status). While most real estate professionals already use that election to avoid these limitations, this change is favorable for those who don’t.

An important clarification regarding this limitation is that it applies to all business interest, regardless of whether you expense it or capitalize it. The same limitation will apply either way.  These rules can be complex, so it’s essential to discuss them with your tax advisor early in the planning process.

Opportunity Zones 2.0

Opportunity Zones were first introduced in the Tax Cuts and Jobs Act of 2017. The original program, now referred to as Opportunity Zones 1.0, was set to expire at the end of 2026, requiring all deferred gains to be recognized at that time with no new Opportunity Zone investments. While Opportunity Zone 1.0 is expiring, the OBBBA introduces Opportunity Zones 2.0, which brings new opportunities for Opportunity Zone investments.

The most notable update is the creation of a five-year rolling deferral period. When you invest cash into a qualified Opportunity Zone fund under the new rules, you can defer the gain for five years, after which it is included back in taxable income. For developers and investors, this changes the timing of tax benefits and could affect how deals are structured.

In addition to getting a gain deferral, you do get a reduction in gain recognition if you hold the investment for the five-year period. Previously, investors could receive up to a 15% reduction if they held their investment for seven years. Under the new rules, the gain reduction is 10%, provided the investment is held through the five-year deferral period. While smaller than before, it still offers a meaningful incentive for long-term planning.

One major benefit of Opportunity Zones remains unchanged: if you hold your investment for at least 10 years, the appreciation on that investment becomes tax-free when recognized. For real estate professionals, this could make Opportunity Zone projects attractive for long-term development strategies. It’s important to note that this applies only to the appreciation; the original deferred gain will always be included back in taxable income.

Another significant change is the Opportunity Zone map. Round one allowed for a broad range of Opportunity Zones, including some that qualified simply because they were contiguous to eligible areas. Round two eliminates that flexibility and shrinks the map considerably. Governors in each state will designate the new Opportunity Zones, which will then be finalized by the Treasury.

One critical point to remember: to benefit from Opportunity Zone incentives, you must have capital gains to defer. Simply investing cash without a gain does not qualify. This requirement often surprises investors who assume any investment in an Opportunity Zone automatically receives favorable treatment.

The legislation also introduces a new class of funds targeting rural areas. The substantial improvement threshold for these zones is reduced from 100% to 50%, meaning an investor only needs to put in half the original basis to qualify. Additionally, the gain deferral reduction after the five-year deferral period increases from 10% to 30%, creating a strong incentive for rural development.

It’s worth noting that these Opportunity Zone 2.0 changes do not take effect until 2027. While this delay gives investors time to understand the rules and plan accordingly, it may also create a lull in Opportunity Zone activity until the new program begins. Still, the long-term potential for economic growth (especially in rural areas) could reshape where real estate capital flows in the years ahead.

Learn More

The Internal Revenue Code is full of “it depends” scenarios, and these new provisions are no exception. With so many changes and caveats, real estate professionals should connect with a knowledgeable tax advisor early.

To learn more about how the OBBBA will impact your specific company, contact your Warren Averett advisor directly, or ask a member of our team to reach out to you