The One Big Beautiful Bill/Act (OBBB), which was signed into law on July 4, promises to significantly affect the national and local commercial real estate sector with its tax incentives, impact on raising and deploying capital, and favorable approach to Opportunity Zones.
At a recent seminar sponsored by Land Services USA and CohnReznick, commercial real estate, tax and finance professionals explored the emerging opportunities and possible negative consequences of the federal legislation.
Ray Jackson, Stonewall Capital; Sam Williamson, First American Title Insurance Company; Garrett Wells, CohnReznick; E.J. Edelman, CohnReznick; Shawn Goldfaden, Land Services USA.
Preserving 1031 like-kind exchanges, which provide real estate investors with a vehicle to defer capital gains taxes when reinvesting in a similar property within a set timeframe, was a significant win and big relief for the real estate industry, explained Shawn Goldfaden, Commercial RE Counsel at Land Services/Mid Atlantic Exchange.
That conclusion was echoed by Garrett Wells, a Tax Partner in CohnReznick’s Commercial Real Estate Practice: “Most importantly, the bill restored certainty for 1031s, and there was a major upgrade incentive with 100 percent bonus depreciation. The qualified business income deduction is now permanent and the estate tax exemption was doubled.”
Other key takeaways:
- OBBB will increase deficits by $3.4 trillion over the next 10 years, which creates uncertainty around the federal government’s ability to bring interest rates down further, manage inflation, and control federal borrowing costs.
- The bill aims to increase affordable housing investments with the expansion of Low-Income Housing Tax Credits and the permanent extension of the New Markets Tax Credit.
- OBBB restores the computation of assessable transfer of interest to exclude depreciation, amortization, and depletion for taxable years beginning after December 31. 2024. The legislation allows interest expense deductions to be calculated based on earnings before interest, taxes, depreciation, and amortization (EBITDA) rather than earnings before interest and taxes (EBIT).
Stonewall Capital Managing Partner Ray Jackson said the impact of OBBB is welcome news because, in his estimation, banks remain on the sidelines and, when making loan decisions, they are looking for additional equity and greater collateral in the deal.
“Although the industrial sector remains strong, homebuilders seem to be pushing projects out farther and delaying starts,” he said. “OBBB might help unlock some local development projects.”
Goldfaden pointed out that the massive shift towards making the 1031 safe harbor provisions permanent will stimulate activity and he expects to see more integration with Opportunity Zones. Some investors are combining 1031 Exchanges with Opportunity Zone investments to optimize tax benefits, but this requires careful planning.
“By also preserving 721 UPREIT exchanges, it adds another major tax tool for portfolio optimization in commercial real estate, offering long-term planning certainty,” Goldfaden said.
A return of 100% bonus depreciation, along with a permanent reduction in tax-exempt bond financing requirements for low-income housing, should create additional demand from institutional capital, which will further incentivize investors to participate in low-income housing tax projects that ultimately will help increase the housing supply, Wells said.
Edelman added that the tightening of median family income thresholds within designated opportunity zones will benefit low-income housing tax credit developers because these two programs will better overlap now and better serve low-income families and communities in need of housing.