OBBBA’s impact on Commercial Real Estate

Congress recently passed the new tax law, and the President signed it into law on July 4^th.  It’s known as the One Big Beautiful Bill (OBBBA).  It effectively extends the 2017 Tax Cuts and Jobs Act which at the time reduced the corporate tax rate from 35% to 21%, created a 20% deduction for pass-through entities, like LLCs, lowered tax rates for individuals and eliminated personal exemptions, along with other provisions.  Its pro-business thrust was the biggest tax overhaul in decades.  So, now the OBBBA extends many of those tax cuts and more.  Here is a very brief summary of the new tax act and you can see that it has lots of good things to move real estate forward.

 

Bonus deprecation is now reinstated 100% for qualifying assets such as tenant improvements to a lease space;

 

Section 179 100% first-year deductions are made permanent, incentivizing immediate business investments in machinery, equipment and work vehicles;

 

1031 tax deferred exchanges are expanded to include partial-interest swaps, infrastructure investments and select equipment used in CRE operations;

 

Opportunity Zones opportunities will be updated and enhanced; several provisions should stimulate manufacturing, especially re-shoring investments;

 

Qualified Business Income (QBI) 20% deduction is extended for pass-through entities like partnerships, LLC’s and S-corporations;

 

Mortgage interest deduction becomes permanent in 2026 and will then include mortgage insurance premiums, helping home owners, buyers and then home builders and construction.

 

Finally, the EBITDA definition of income is reinstated so that income and depreciation are not deducted from the denominator for calculation of the business interest expense limitation allowing for greater deduction of business interest expense from taxable income.    I compiled this summary from reviews by accounting firms Armanino and Sol Schwartz & Associates but please consult your accounting firm on how OBBBA will impact you personally and professionally.

 

All-in-all the OBBBA will stimulate the economy and commercial real estate investment with new and old tax breaks.  With the administration pushing for more foreign investment in the U.S., incentivizing re-shoring of manufacturing and providing tax breaks, industrial real estate may be especially attractive.  Also, this means buyers may become more aggressive this year in looking for value-add opportunities that can be remodeled, renovated and repositioned for higher values.  Sellers will also be incentivized to move properties that have been on their books too long.  When you couple that with the impending interest rate decreases that I wrote about last month, we are getting set up for a good run in commercial real estate.

Send comments to raub@investmentrealty.com