The commercial real estate landscape is undergoing one of its most significant policy overhauls in years. The recently enacted “One Big Beautiful Bill” brings sweeping changes to tax incentives, financing rules, and investment strategies. For commercial real estate (CRE) investors, developers, and owners, this new environment creates meaningful opportunities but also complex considerations. We have provided the below summary to help you understand the latest changes so you can seize new opportunities while managing risks effectively. At Morris, Manning & Martin, LLP, our commercial real estate team is committed to providing proactive, tailored legal guidance to help you capitalize on these developments and navigate the complexities of today’s CRE market. Please reach out with any questions or to discuss how these changes affect your specific investments or projects.
Bonus Depreciation is Back and Extended
One of the headline changes in the bill is the restoration and extension of 100% bonus depreciation through 2029. This means owners and developers can immediately expense the full cost of qualifying property improvements—including renovations, equipment, and building systems—rather than depreciating them over multiple years. Additionally, the Section 179 expensing limit doubles from $1.25 million to $2.5 million (with the phase-out threshold starting at $4 million), intending to improve liquidity and reduce upfront financing for property improvements. Operators in the CRE market should be mindful of structuring acquisitions and improvement contracts to clearly identify assets eligible for bonus depreciation. For multifamily or mixed-use developments, operators should thoughtfully allocate cost segregation to maximize upfront deductions.
1031 Exchanges Remain Untouched
Amid speculation about the end of 1031 like-kind exchanges, the final bill preserves this vital tool in full. Investors can continue deferring capital gains tax by reinvesting in similar properties, without dollar caps or holding period changes. Despite no changes to 1031 at the federal level, investors should be cautious of local or state-level tax treatment.
National Tax Incentives Boost Affordable Housing and Investment Returns
The bill delivers incentives to revitalize affordable housing investment, most notably through substantial expansions to the Low-Income Housing Tax Credit (LIHTC). The bill raises the 9% LIHTC ceiling rate to a permanent 12.5% allocation increase and lowers the financing threshold for the 4% LIHTC from 50% to 25% of project costs, with intended benefits of allowing states to allocate more credits per year and increasing the feasibility of bond-financed projects. This is a critical advantage for developers targeting the growing demand for workforce and affordable multifamily housing nationwide. Developers will need to work closely with tax credit syndicators and local housing authorities early in the process to secure commitments under the new rules before the competition surges.
Additionally, mortgage interest deduction limits have been expanded, and the Qualified Business Income Deduction on rental income is preserved at a permanent 20% for pass-through entities. These tax enhancements aim to improve cash flow and returns, particularly for partnerships and LLCs structuring their investments to maximize these benefits. Investors may need to reassess their entity structuring to navigate IRS trade-or-business requirements and reasonable compensation to assess the ability to qualify for the full deduction.
Revival of Opportunity Zones
The bill intends to encourage long-term capital investment in underserved areas by extending Opportunity Zone (OZ) benefits through 2033, revising the basis step-up after 7 years, and including enhanced benefits for rural Opportunity Zones. Opportunity Zone investments require strict compliance with timing, use, and reporting requirements, and developers need to remain considerate of these.
Increased Interest Deductibility
The bill modifies Section 163(j) of the Internal Revenue Code by allowing interest expense deductions to be calculated based on EBITDA rather than EBIT, benefitting highly leveraged projects such as ground-up developments or adaptive reuses. Operators should revisit their debt structures and partnership agreements to ensure interest allocations and guarantees are clearly documented to maximize deductibility under the new framework.
ESG Considerations
The bill has curtailed certain green-building tax credits, particularly the phasing out of Section 45L home energy credit after 2025 and scaling back the commercial solar and energy-efficient property credits (Sections 48E and 179D of the Internal Revenue Code). This may lead to a slowdown in green-certified commercial developments or retrofits—especially where energy incentives had previously improved return metrics— possibly shifting focus away from sustainability-driven developments in the near term. Operators should consider utility rebates, state-level green programs, and LEED premiums to supplement lost federal credits.
Potential Adverse Consequences
While these incentives are promising, investors should remain mindful of potential headwinds. Market experts indicate that the bill’s impact on the federal deficit raises the prospect of higher interest rates and inflation risk, which could increase borrowing costs and affect property valuations, especially for office and retail assets still facing post-pandemic challenges. While certain construction firms anticipate a short-term boost in projects, particularly in residential and affordable housing sectors, supply chain and labor shortages continue to persist as constraints in the construction sector.
