The reconciliation bill that made its way through the House Thursday morning contains a plethora of tax provisions, including several of note to those in the commercial and residential real estate industry.
Tyler Davis, president of Saunders Real Estate and a former tax manager at PwC, shared what he’s watching in the One Big Beautiful Bill Act (H.R. 1) — and where there is room for changes. The House passed the OBBBA with a 215-214-1 vote on May 22. It’s headed to the Senate next, where changes are expected.
Overall, the House bill is “very pro real estate on several fronts,” Davis told Checkpoint. “I think it will do a lot to incentivize investment and new projects,” he added.
Section 199A.
Among the provisions Davis is most excited about is the extension of the pass-through deduction under Code Sec. 199A.
The 2017 Tax Cuts and Jobs Act generally provides noncorporate taxpayers with an income tax deduction of 20% of their qualified business income from partnership, S corporation, or sole proprietorship; plus 20% of the taxpayer’s qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
“A lot of real estate investment groups are structured as partnerships, whether they’re regional home builders, construction companies, or investment companies,” Davis explained. While Section 199A doesn’t apply for national home builders that are C corporations, Davis said it has a substantial impact for “smaller regional home builders and smaller local developers.”
The Section 199A deduction, however, is slated to sunset at the end of 2025 under current law. The House-passed reconciliation bill would make it permanent — and boost it to a 23% deduction.
Making the 199A deduction permanent “gives a lot of confidence and clarity to people who are looking at deals,” Davis explained. “In general, when people are uncertain about things, they tend to shy away from projects,” he said.
“There’s been a lot of uncertainty around tariffs,” he noted. However, with greater clarity on the tax provisions, Davis predicts “there’s going to be a lot of excitement in the real estate industry to take on new projects, whether industrial, residential, or retail.”
And the increase to 23% is “another positive for a lot of investors and developers,” said Davis. “That’s an extra 3% deduction that a lot of investors can receive on certain net income that comes from investments — whether that’s ground-up developments or new homes that are being constructed.”
Bonus depreciation.
The OBBBA also would provide for 100% bonus depreciation for property that is acquired and placed in service from the date of President Donald Trump’s inauguration until January 1, 2030.
Under current law, Code Sec. 168(k) provides an additional first-year depreciation allowance for qualified property. The bonus depreciation rate was set at 100% by the TCJA for property placed in service between September 28, 2017, and December 31, 2022. However, that rate is being phased down in 20% increments, and is set to zero out in 2028.
Davis said bringing back 100% bonus depreciation “could have a very large impact on not just new projects, but also … from a more domestic manufacturing and warehousing perspective.” If the provision is passed into law, he anticipates “an uptick in new industrial starts.”
Demand has been fairly stable for “smaller, local companies” and “flex spaces that are a little bit office in the front and industrial or warehouse in the back,” said Davis. But he expects the OBBBA changes will have a greater impact on larger square-foot warehouse developments. “A lot of those developers are merchant-developers, as opposed to owner-users,” he said, and “it’s hard in the current interest rate environment to get projects to work.”
Affordable housing.
An area where the OBBBA could use some work is in spurring affordable housing construction. Under current law, the Low-Income Housing Tax Credit may be claimed annually over a 10-year period for the costs of building or rehabilitating rental housing for low-income tenants. The building must have received a credit allocation from the state or have been financed with the proceeds of certain tax-exempt bonds.
Davis said that while developers are able to get the LIHTC “to work” in urban areas, that’s not the case in “secondary, tertiary, or even rural markets where there is a demand for affordable housing and low-income housing.”
In underwriting these deals, he explained, a key factor is “the amount that they can charge as a percentage of rent.” But in non-urban areas, “market rents are not high enough, so they can’t get enough in rent even once you factor in the credits.”
“What we get is a lot of luxury apartments or higher-market rent apartments — and not any new affordable housing projects — which is really unfortunate,” said Davis.
Housing credits available for allocation by a state are limited under current law to the state housing credit ceiling. The OBBBA modifies the LIHTC by increasing the state housing credit ceiling in 2026 – 2029. It also allows additional buildings financed with tax-exempt bonds to qualify for housing credits without receiving a state credit allocation.
For more on the Code Sec. 199A deduction, see Checkpoint’s Federal Tax Coordinator ¶ L-4305 et seq. For more on bonus depreciation, see ¶ L-9310 et seq. For more on the Low-Income Housing Tax Credit, see ¶ L-15700 et seq.
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