“The One Great Beautiful Bill” has generated much discussion, both pro and con. The legislation, passed by the House of Representatives, is part of a larger reconciliation bill to address the Tax Cuts and Jobs Act of 2017, with additional tax cuts, spending cuts, and possible tax relief thrown in for good measure.
The bill is currently in the Senate’s hands, and there will no doubt be changes. In the meantime, Connect CRE reached out to real estate legal experts to discuss the legislation and its potential CRE impact.
The Bonus Depreciation Reinstatement
One of the bill’s provisions that really stood out was the reinstatement of bonus depreciation. As of now, the current deduction is 40% and would be phased out in 2027.
But if passed, the provision would allow a 100% deduction for eligible property that is purchased and placed in service between January 19, 2025, and January 1, 2030.
The upshot is that “we expect that the reinstatement of bonus appreciation will generate an increase in CRE investment,” said McRae Thompson, leader of Real Estate Tax Advisory and a senior managing director with FTI Consulting, Inc.
Delving somewhat deeper, Ross Albers noted that the provision could provide benefits for value-add and rehab owners and developers. “The bonus depreciation could spur investors to fast-track renovations and upgrades to take advantage of the accelerated depreciation schedule,” said Albers, who is Albers & Associates’ CEO and Founder. Meanwhile, for developers, the stipulation could reduce the after-tax cost of capital improvements, making it easier to reinvest in properties and operations.
“It also increases the overall return on investment, which could affect how aggressively firms underwrite deals,” Albers added.
Additional Possible Positives
If the potential for a large bonus depreciation weren’t enough, Cox, Castle & Nicholson Partner Laura Cable commented that an extension of the 199A deduction will make real estate investors and developers happy. The deduction, scheduled to expire in 2025, permitted certain taxpayers to deduct 20% of their qualified business income from passthrough entities, along with some REIT dividends. “This bill not only seeks to make the deduction permanent, but it also increases the deduction to 23% of the qualified business income,” Cable said.
Additionally, the bill calls for the extension and modification of the Qualified Opportunity Zone Program. Cable explained that while there was a great buzz around the program when it was introduced in 2017, it was also “complicated and relied heavily on Treasury Regulations that had not been issued. By the time people got their arms around how the program worked, some of the tax benefits had already expired.”
However, if the bill breathes new life into the program by extending it and expanding potential tax benefits, Cable said there could be excitement around real estate opportunities in Qualified Opportunity Zones.
Then There are the Drawbacks
The tax bill could also generate problems within the commercial real estate industry. For instance, the Section 899 “revenge” tax could be problematic for foreign CRE investments in the U.S. “This applies to foreign businesses operating in the U.S., in which the home country imposes what the U.S. government deems to be ‘unfair foreign taxes’ on U.S. businesses operating globally,” Thompson explained. The provision could lead to a 5%-20% withholding tax, which could “drastically impact the economies and activity of certain foreign investments in U.S. real estate,” Thompson observed.
Meanwhile, Albers shared his concerns that the bonus depreciation focus could overshadow concerns about interest deductibility and possible limitations on 1031 exchanges. “If there are trade-offs later in the legislative process — such as tightening limits on 1031 exchanges or introducing caps on passive loss rules — that could dampen some of the benefits,” he said, adding that other concerns include inflationary pressures and how incentivized reinvestments could impact tax assessments and property values.
Something else that isn’t necessarily a drawback, but is surprising, is non-inclusions. “The main focus of the tax bill seems to be on extending or modifying the existing provisions from the TCJA, rather than introducing new concepts,” Cable noted. The surprise is that the Trump administration had been suggesting that the bill would represent a major overhaul of the tax code.
One example was the TJCA’s three-year holding period for carried interests for capital gains rates qualifications on properties. Cable said that the provision impacted commercial real estate deals that had a carried interest component.
“Congress and the current administration talked about eliminating the preferential tax treatment, but the current bill doesn’t include any changes to the carried interest at all,” Cable said.
A Happy Result?
Even with the drawbacks, the experts feel that the legislation in its existing form should favor the CRE industry. Thompson pointed to permanent changes with domestic activities deduction through section 199 and temporary changes involved with interest expense deduction limits and, of course, bonus depreciation.
But Cable issued a cautionary note with the reminder that the current bill isn’t the final product. “In 2017, we saw major modifications and amendments up until the final vote,” she said. “Nothing that is currently in the bill is guaranteed to be in the final version.”
Still, the legislation demonstrates the link between commercial real estate efforts and tax strategy. Albers explained that such changes can generate a rush of activity.
“I’d advise investors and developers to consult with both their real estate counsel and tax advisors early to assess how any final bill could affect their holdings, depreciation strategies and future acquisitions,” he added. “The best-prepared players will be the ones who can act quickly once the rules are finalized.”
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