Understanding the Real Estate Provisions in the “One Big Beautiful Bill” Act

So if you're a high income taxpayer or you have certain types of trades or businesses, your deduction is limited under current law and then this house proposal would expand the range over which those deductions are phased out to a degree, the Senate proposal would maintain the existing 20% rate, so it doesn't go up, but it does extend the provision and make it permanent. It retains the current W2 capital investment and SSTB limitations that are currently in place, but it also expands the phase out range over a slightly larger income bracket, potentially allowing additional taxpayers to take advantage of the deduction.

As far as real estate goes, one nine a QBI I deduction is particularly important for real estate debt funds that operate without the W2 and capital investment support factors because we've seen a lot of them utilize and incorporate REIT structures and REITs are allowed a automatic inclusion in this QBI income. So REITs took advantage of winning NA and QBI and it's good to see that this provision is currently expected to continue. This is a pretty easy one. Qualified residence interests pre-tax Cuts and Jobs Act. It was a million dollars of acquisition indebtedness plus a hundred thousand dollars of home equity indebtedness. The TCGA reduced those thresholds to 750,000 married finally joint and 375,000 married by separately and made the home improvement. Disallowed TCJ limitations of the house are made permanent, so the 750,375,000 caps would be permanent. The Senate proposal does the same, but it does include mortgage insurance premiums treated as qualified resident interest and deductible starting in 2026. So nothing exciting here, just effectively making permanent what we have now. So with that I will turn it over to Michele for our next section.

Michele Rosenman: Thank you Ryan. I'm Michelle Rosenman, tax director at EisnerAmper in the Real estate group. I'm going to discuss some of the, I guess, depreciation related proposals that the housing Senate put through. So the first one is the extension of the a hundred percent bonus depreciation and special appreciation loss for qualified production property under current law. The additional first year depreciation was allowed on qualified property equal to an applicable percentage of the adjusted basis of the property. Prior to 2022, you could take a hundred percent bonus, but for properly placed in service after 22, the bonus was being phased out by 20% each year and that would be fully phased out after 2026. The house proposal provided for a hundred percent bonus depreciation for qualified property acquired in place and service after January 19th, 2025 and before January 1st, 2030 and then after that it would go back to zero. However, the senate proposal from yesterday would make a hundred percent bonus depreciation permanent for qualified property acquired and place of service after January 19th, 2025. So I think everyone's hoping that the Senate proposal goes through because this is great for our real estate clients.

However, I think for property acquired place of service after, I'm sorry, on or before January 19th, 2025, it's limited to 40% and 60% in the case of a long production property. Now both the House and Senate proposals create a new section 1 68 N, which allows a hundred percent depreciation for non-residential real property that qualifies as qualified production property or QPP. So under current law, taxpayers are generally required to deduct the cost of non-residential real property over 39 years or 40 years. The special appreciation allowance for the qualified production property allows taxpayers to deduct a hundred percent of the adjusted basis of such property in the year it is placed in service. Qualified production property includes non-residential real property used as an integral part of a qualified production activity such as manufacturing production or refining of tangible personal property. In order to qualify, the property must be used by the taxpayer in a qualified production activity. It has to be placed in service in the US or US possession construction, sorry. The originally used has to start with the taxpayer construction begins between January, 2025 and December 31st, 2028 and this place of service before January 1st, 2033 under the house bill, but I think it was January, 2031 under the Senate bill. This is subject to RC section 1245 recapture. If at any time during the 10 year period beginning of the date that was placed in service by the taxpayer, it ceases to be used as an integral part of a qualified production activity.

So the house bill also reinstated depreciation depletion add-back for our C-section 1 63 J under current law for taxable years beginning on or after January, 2022, taxpayers no longer able to add back depreciation, amortization and depletion in determining adjusted taxable income for 1 63 J. Interest limitation purposes, the house proposal reinstates, the depreciation amortization and depletion add back to taxable income when computing a taxpayer's just taxable income for tax years beginning after seventh around 2024 and before January 1st, 2030. The Senate proposal actually would permanently modify the definition of income for Section one three J and would allow the add back of depreciation amortization for years beginning after 12 31 20 24.

In looking at this, one of the exemptions for under one three J is that an entity can make an electing real perpetrator business selection, but if they make the selection then they have to use a DS instead of GDS, which results in a so depreciation deduction. So real private trade businesses would need to carefully analyze the impact of this reinstated EBITDA calculation to determine the most advantageous approach going forward and consider trade-offs between interest expense deduction and depreciation. There's also the increased RC section 1 79 expensing limits both the house and the Senate would raise the expensing limit under the RC section 1 79 from 1 million to two and a half million and the phase out threshold from two and a half million to 4 million and both of which would be indexed for inflation starting in 2026. I'm going to move it over to James Wang.

James Wang: Thank you Michelle. My name is James, I'm a tax director at EisnerAmper. Good to see everyone. Today I'll provide an update on the self deduction cap, the self walkaround limitation and the permanent access business loss rule and the TRS asset test. We'll cover the history, the current law, and what's the proposed in the house of 2025 tax bill and also the latest proposal from the Senate bill Yes, from yesterday. So let's start with the sell cap. The TCJ 2017 introduced a significant change to the self deduction. So beginning in 2018, individuals were limited to a 10,000 annual cap or 5,000 if Mary filed separately. So before TCJ there was no such cap and taxpayer could generally deduct all their state income sales tax plus property tax. This new cap hit hardest in IT highest tax states such as New York, California and New Jersey. Now fast forward to today, 2025, that 10,000 cell cap is still in place as scheduled to sunset on December 31st, 2025.

So unless the bill gets signed into the law, the pre TCJ rule meaning unlimited self deduction will return starting in 2026. Now under the house bill, the self deduction cap will be made permanent, but the limit will increase to 40,000 for joint file and 20,000 for married file separately started in 2025, but here is a cap that for high income taxpayers, specifically those with modified A GI over 500,000, the cap faced down by 30% of the access income, but that won't drop below 10,000. So in practice, taxpayer will modify a GI of 600 or more will continue to face the standard 10,000 self deduction limit. The bill also includes a 1% annual inflation adjustment from 2026 through 2033. After that, the cap will freeze at its 2033 level. Now let's look at the latest Senate proposal, the Senate version of the tax bill routine, the 10,000 cap on self deduction, which Senate leader have described as a temporary placeholder pending negotiations with the house.

A key reason for maintaining the cap is the cost because raising it would reduce federal revenue by estimate of 350 billion over 10 years and Senate Republicans have signaled that they will rather direct the funding towards extending temporary business tax provision that they view as a pro more of a pro growth. Additionally, no senate Republicans represent high tax states making salt relief a low political priority in the upper chamber. However, this stance has escalated tensions with the house Republicans, particularly those from high tax district who view the distortion of the 40,000 sub cap. As a non-negotiable, the house bill passed by just one vote and several house members have warned that any reduction to the sell cap in the final legislation could cost their support. So they believe that they have the significant leverage as the current cap is set to expire entirely up to 2025 if there's no agreement was reached.

So we should expect some amendment over the next few days. Now let's turn to the walkaround. In response to the south cap, many states develop a workaround to pass through entity tax under the regime the entity itself elect to pay state income tax at the entity level and gets a federal deduction of the state tax payment and the owner received a state tax credit in notice 20 20 75. The S formally endorsed this workaround. It clarified that the state income tax paid by a partnership corp could be treated as a deductible business expense at the entity level. Now following the notice, the workaround took off as of mid 2024, 36 states have adopted. T law consists with the IRS guidance. The benefit is obviously meaningful, potentially saving up to 37% of the federal tax on state tax payment above the 10,000 cap. Now the house passed the proposal to roll the T benefit for certain taxpayers starting with tax year up to 2025.

The bail divided path through entity into two category based on the definition under 1 99 A, the qualified trade of business, a specific service trader business TB for qualified business such as real estate, the PTT benefit remain intact as long as the entity continued to meet the definition of a traded business. In section 1 99, a regulation with one requirement if at least 75% of the gross receipt came from non TB activity. Now however, the state tax paid by the SB path through will no longer be deductible at the entity level. Instead, they must report the owner on their K one and those amount will be subject to the 10,000 cell cap on their individual return. Those includes law firm accounting, practice, consultants, financial services, essentially any business where the primary asset is the scale reputation of the owner or the employee. The A IPA and the CPA society from many states and jurisdiction actually have tried to push back urging the Congress to keep the PTT deduction available for all path through.

They argue the change of unfairly targets professional service, many of which cannot form a corporation due to regulatory reason and runs counter to the goal of supporting small business. It's also worth to noting that the original draft of the house bill would have ended the PTET benefit for all path throughs, but the technical correction was made at the last minute so that only SSTB was targeted. Now let's move on to the Senate proposal removes the distinction between the 1 99 a qualifying and non-qualifying income that was proposed from the house bill and instead introduced a new limitation and the 2 75 B that directly target T deduction. So under this provision, the amount of P that can be deducted is limited to the greater of the 40,000 or 50% of the PTT paid. Now importantly, this deduction is then reduced by any personal state and local tax already claimed such as income or property tax, both of which counted towards the 10,000 cell cap.

This creates a much less favorable outcome from comparing both the current law and the house proposal. But however, unlike the house versions, there doesn't appear to be a specific limitation on the SSTB and it seems like all pass through entity will qualify. There's also additional changes to the PTET regime in the Senate bill, but given the likelihood of further revision, I won't go into too much detail at this stage. I was important to note that the Senate bill introduced a comprehensive anti-avoidance framework to enforce the new SALT and PTET deduction limitation under 2 75. The bill introduced a new sub substitute payment rule under which any payment that results in a specified tax benefit such as self deductions equal or exceeding 25% of the payment amount may be recharacterized as a substitute payment and deny deductibility. This target structure designed to indirectly replicate self benefit including intercompany charges, fee arrangement and path through allocations.

The bell also direct treasury to issue regulation targeting allocation strategy, partnership structure, and other arrangement that attempt to undermine the deduction limitation and the 2 75 B. Now let's move on to the access business loss limitations. Under the current law, the EBL limitations applies to non corp taxpayer after applying the past passive activity loss at risk and basis rules and is scheduled to sunset up to 2028. Any sense if a non-corporate taxpayer's total deduction from all traded business exceeds their total gross income from the traded business by more than the inflation adjusted threshold, the access non-deductible in that year? For example, in 2024, the threshold is 305,000 for single and three 610,000 for joint. The disallowed losses is then carried forward as an NLL to the next year and can be offset against the other type of income subject to the 80% taxable income limitation. The house proposal would remove the sunset and make 4 61 permanent. In addition, it includes a technical change from 2025 onward. Disallow access loss will no longer be treated as an NOL carry forward. Instead, any access business loss will remain access business loss in subsequent year and then usable only to offset the future business income.

The Senate bill is similar to the house proposal and in addition clarified that when an estate or a trust terminate or unused care for losses including BLS must be distributed to the beneficiary. So if a trust has a 500 K disallowed EBL L and it terminates in 2026, that 500 passed through, that 500,000 losses passed through to the beneficiaries and is available to offset business income on their return subject to the 4 61 L limitation. Additionally, the senate bill clarified that when COD income is excluded under 1 0 8 a such as bankruptcy or insolvency in which the exclusion is generally a timely benefit as it defers income recognition through a reduction of a list of tax attributes such as L capital loss carry over, passive activity loss, et cetera, the proposed expressively provided that 4 61 excess business loss carry forward will be traded as one of the tax attributes subject to the reductions.

Now lastly, I want to talk about quickly talk about the TRS and the asset test real estate investment trust REITs are required to derive most of their income from rent interest dividend. Other real estate sources and similarly mostly hold predominantly real estate assets. Taxable REIT subsidiary or S is a wholly owned or partially owned corporate subsidiary of a REIT that can perform non-qualifying activities such as operating a hotel or healthcare facility business providing impermissible tenant service income to the tenant or just simply holding non-real estate assets. Now obviously there's other things to watch out for when you're operating A TRS such as making sure the intercompany lease arrangement reflects the arm length and whatnot. But this obviously will be a different topic to discuss, but basically TRS is a common tool that reads utilize to have the TRS provides service or whole asset that REIT itself cannot do without jeopardizing its REIT status.

So to prevent the abuse, the tax law limits how much of the REIT asset can consist of a s prior to t, A REIT can hold up to 25% of its total asset value, meaning one or more S entities. The 2017 tax reform restricted the res RS holding at the beginning. After 2017, the allowable portion of the re asset that can be represented by TS security was reduced from 25 to 20% of total assets. Now house proposal restored the prior 25% threshold and providing read with expanded flexibility in structuring service oriented and taxable operations. The Senate bit for some reason was silent on the TIS asset limitation and which retain current 20% threshold by default. We'll have to wait and see if those will be added later on and with that I'll move to Michael to talk about the opportunity funds.

Michael Torhan: Great, thanks James. Hi everybody, my name is Michael Torhan. I'm a tax partner in the real estate practice and I'll be talking about some of the changes to the qualified opportunities zone program and there's quite a few. So let's talk about each of the different kind of categories of changes starting with what's happening with the QC program and the QC designations. The House and Senate proposals both extend the programs. However, the house proposal launches a second round of the program from 2027 to 2033. Currently the QOC program runs through 2026. 2026 is the inclusion year for historical gains that were deferred. The house takes it and creates another round of the program beginning in the following year, 2027. Some of the key points in the house proposal for the second round is that the actual QOE designations are going to be a lot. There's going to be a much narrow definition of what's designated as a QOE, the definition of low income communities.

It's going to have a narrow definition. There's going to be a new requirement that at least 33% of the zones be in rural areas. So that is a key distinction from the current QCs that are designated. The house proposal also goes on to set the prior designations to expire on December 31st, 2026 and then the new designations are going to be in fact from January one of 27 through December 31st, 2033, a change in the provision. So the existing QOE rules did provide for some contiguous tracks to be eligible for designation that is removed under the house proposal. So it's only the qualified zones that are designated are the only ones that are eligible for the program. The senate proposal on the other hand, it actually effectively permanently repeals the sunset on the election. So it creates a new kind of rolling program and it does that through the creation of what's called the sandal determination dates.

So effectively beginning July 1st, 2026 and then every 10 years after that. So the July 1st occurring 10 years after the prior decennial determination date. So the following one would be July 1st, 2036 is a new round of the program. So the states have the opportunity to designate qualified zones within the 90 day period subject to a 30 day extension after each decennial determination date. So every 10 years you'd effectively automatically have the opportunity for states to designate new qualified opportunity zones. The designations would be in effect from the applicable start date, which is defined as January 1st of the year subsequent to the year of designation. For example, if there's zones that are designated, let's just assume it's September 1st of 26, the start date for those designations would be January one of 27, and then those designations would expire automatically on the day before the 10 year anniversary of the start date again.

So if it started January 1 27, they would expire December 31st, 2036 again. So it's basically a 10 year period where you have these designations. The Senate proposal goes on to specifically repealed the special rule for Puerto Rico. So in the existing law there is a rule that states that all low income community tracks are designated as POCs in Puerto Rico that is specifically repealed under the Senate proposal. The Senate proposal also has a similar narrow definition of low income communities, but there is no specific requirement that 33% of zones be in rural areas. So there is a change from the house proposal as we'll talk about later. There are special benefits for investments in rural areas in both proposals, but that requirement is not in the Senate proposal. The contiguous tracks are also not eligible for designation under the Senate proposal, so that's similar in both proposals and there's no specific early expiration of the prior designations. So under the current law, current designations run through 2028. That's 10 years after they were designated in 2018. The house proposal makes those prior designations expire at the end of next year. The Senate proposal does not have any specific early expiration currently in it.

Let's talk about QLZ gain deferrals and inclusions right under the current law, investors that elect to invest into qualified opportunity zones are able to defer capital gains. Those deferred gains are subject to inclusion at a point in time for the existing program. Up until now, everybody is aware of December 31st, 2026, right the end of next year as being the inclusion date since the program would be extended or made permanent under the house or Senate proposals. Both proposals talk about the inclusion date going forward. The house proposal states that the date of inclusion for deferred gains in the second round is going to be the earlier when the investment is sold or exchanged, so that provision is consistent with existing law or December 31st, 2033. That's the new end of that second program. So similar to the old program, the inclusion date would be the last date of that program, December 31st, 2033.

Important to note is that the inclusion date is based on the date the investment is made into the QF as written actually both in the house proposal and the Senate proposal. The inclusion date again is when the investor made the investment into the QF and that's not necessarily tied to when the original capital gain was incurred and we'll talk about a potential kind of planning opportunity there. The Senate proposal, again under the Senate proposal there is a rolling new program every 10 years. The date of inclusion under the center proposal is again earlier of either when the investment is sold or exchanged or the first decennial recognition date occurring after the date of investment. Again, another new defined term decennial recognition date. It's the first recognition date is going to be December 31st, 2033 and then each December 31st occurring 10 years after the preceding recognition date. So effectively again, it's going to be the last day of each 10 year QOZ period.

That would be the inclusion date under the Senate proposal. Again, like I mentioned, the inclusion date is based on the date investment is made into QOF. This does raise an interesting opportunity maybe or timing, consideration for potentially deferred gains either this year or in 2026 for any gains recognized in 2025. As these proposals are written and under the current regulations, an investor would have to invest and gain by sometime in 2026, right, particularly if it's coming from a K one from a partnership, the investor has till 180 days after the partnership original due date of the return, so it's generated sometime early September. So if there is a capital gain in this year, an investor could potentially have until next September at some point to invest. So because of that under either proposal and under the current law, that gain would be recognized or deferred at the end of next year, summer 31, 20 26.

If the gain instead is recognized in 2026 or realized in 26, if investor has a partnership interest that reports a gain to them for the 2026 tax year, remember that gain will be reported in 27. That investor could theoretically either invest into a QF in 26 and investor in a partnership is allowed to use the partnerships realization date for the 180 day period, or they could potentially invest in 2027 because the gain would be reported on a K one issued in the beginning of 27, and so they would make an investment in 2027. As these are currently written, that means an investor who invests at the end of 26 would not have much of a deferral, right? Their deferral would be to the end of next year, December 31 of 26. On the other hand, if an investor waits until 2027 again to reinvest the same gain, right, the gain is still coming from a K one for the 2026 tax year.

That investor may have until 2033 to recognize that gain as an inclusion. So that's going to be an interesting to see how these rules kind of shake out in the final tax bill if there's going to be any mention of that of when the gains were incurred. But as currently written, it seems like there is some timing potential as to when the deferral may extend to for gains that are recognized. With that said, one does have to be mindful of what Q Zs you're investing in. As mentioned under the house proposal, the existing Q Zs are going to expire in 26, and then in 27 there's going to be new designations. So if somebody waits until 27 to invest into A QF, the zones that you can invest into may be different and vice versa. You may want to invest into zones that are currently designated, but they may kind of not be designated in 27. So under the Senate proposal as currently written, there does seem to be some overlap. Existing zones do extend out still to 28 and there may be some new zones at the same time, so stay tuned for that as well.

This will also drive before it talk about QLZ benefits, just like there'll be timing on the investor kind of investment. Any businesses that are looking to sell assets at the end of 25 or at the beginning of 26, this may play a role as to when you want gains to be triggered. Again, for gains that are triggered in 26, there may be the potential to have deferrals of those gains for a lot longer than if it gains triggered in 25. Again for businesses and funds looking to raise capital. Again, the timing is going to come into play because if investors want to wait until 27 to invest, 26 might be a tougher environment to raise capital for QF funds. Again, there's going to be a lot of timing. These rules, especially the Senate rules are very likely to still change, but that's something we'll be keeping a close watch on over the next couple of weeks.

Talking about the QOZ benefits, again, under the current law there was a 10%, a 5% step up the house proposal. The house proposal replaces those to step up one 10% basis step up, and that would be applicable where investments are held for at least five years. There's also a provision where ordinary income would be eligible to qualify under the QI election, so you would be allowed to invest ordinary income and then participate in that future 10 year step up, right? That is still one of the big benefits of the QC program. After 10 years, you're allowed to step up your basis to fair market value for federal purposes. States differ in their treatment on the Senate proposal. The 10 and 5% basis step-ups are also replaced for a 10% step up, but in contrast to the house proposal, which applies after five years, the Senate proposal has that 10% phase in over six years. For the first three years, the tax break gets a 1% step up. The following two years, you get a 2% step up in each of those years, and in the sixth year or after the sixth anniversary, you get a 3% step up. The total of those six step ups equals to 10%. There is no ordinary income provision in the Senate proposal.

As mentioned earlier, there's enhanced benefits for investments in rural areas under the House proposal that had a requirement for designations in rural areas. Instead of the 10% basis step up, there's a 30% step up in basis again on the deferred gain going into the QF program for investments in qualified rural opportunity funds, those are the funds that invest in rural areas. Likewise, the substantial improvement requirements, which is currently a hundred percent, if you buy existing property, you have to substantially improve the property, meaning you have to double the depreciable basis of the property to qualify as good property. That requirement would only be 50%. In the case of property in a Q comprised entirely of a rural area. The Senate proposal is very similar. The 30% step up applies instead of 10% for rural opportunity funds, similar to the regular 10% step up, the 30% step up is phased in over six years, and that same 50% substantial improvement requirement reduced threshold applies for rural investments in regards to determination of what's a qualified opportunity on property Under the house proposal, there's no specific change to the provisions that qualified property needs to be acquired for purchase after December 31st, 2017.

Under the Senate proposal, because of the new rolling 10 year programs, the language is adjusted so that business property needs to be acquired for purpose by any of the qualifying entities after the applicable start date, right? The applicable start date being the January 1st of the year in which a designation is effective, so that effectively gets the acquisition date to conform with when the QS are designated by the states.

As mentioned earlier, the 10 year basis of fair market value step up is one of the most significant benefits of the QLZ program. If you invest a million dollars into a QLZ and it appreciates to a hundred million dollars after 10 years, that $99 million of appreciation can be excluded. If you've held the qualifying investment for that 10 year period, there is no change to that provision under the House proposal where the step up is based on the fair market value of the investment on the date the investment is sold. The Senate proposal does have a change to that provision, and the fair market value that's used for that step up is based on when the investment is sold. If the investment is sold before the 30th anniversary of the date of the investment, the fair market value of the investment on the date of sale is used. So if the investors sell the property before the 30th anniversary, the stop up is equal to the fair market value on sale. So that eliminates any kind of gain on sale if the investment is sold on or after the 30th anniversary. If there's a much longer hold for an investment, the fair market value for purposes of the Step-Up is locked in as of the 30th anniversary. So that is a significant change in the Senate proposal.

Finally, in regards to the CUI program, there are various reporting requirement changes and penalties that have been added, both the House and Senate proposals, similar provisions relating to additional as well as penalties for non-reporting. A lot of this reporting is already done with the QF reporting each year, but there's some additional items here of no, the approximate number of residential units, any property would need to be reported, as well as the average monthly number of full-time equivalent employees of a QOZ business for the year. That's a change from the current reporting. And likewise, QOZ businesses would need to report information to QQOZ funds so that the q QC funds could actually comply with the reporting requirements. And a lot of these are kind of tied to information reporting rules under the Internal Revenue code, and so there's applicable, applicable penalties. So essentially both proposals really incorporate specific reporting on the QI program, and there's specific penalties that are now tied to the failure to report any of these items. So Congress really wants to make sure that the reporting is done accurately and completely each year by any relevant taxpayer. That's the end, and I'll pass it back to you.

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