Client Alert: Real Estate Provisions in the “One Big Beautiful Bill”
CLIENT ALERT
By Attorney Sandra F. O’Neill
The One Big Beautiful Bill Act (the “Act”) that President Trump signed into law on July 4th renews and enhances numerous real estate tax incentives. Below is a summary of the provisions that affect commercial real estate.
Low-Income Housing Tax Credit
The Act boosts the benefit of Low-Income Housing Tax Credits. For tax years after 2025, the Act provides a 12% increase in the allocation of 9% Low-Income Housing Tax Credit (LIHTC) credits. This change will increase the supply of 9% credits available through the competitive allocation process for each state.
The Act permanently reduces the private activity (e.g., tax-exempt) bond financing requirement for 4% LIHTC credits from 50% to 25% provided that the project is placed in service after December 31, 2025 and at least a portion of the project is financed by tax-exempt bonds issued after December 31, 2025. The reduced requirement for private activity bond financing allows for more private credit financing for these affordable housing projects.
Qualified Opportunity Zones
30 pages of the 887 pages of legislation are devoted to the renewal and enhancement of the Qualified Opportunity Zone (“QOZ”) tax benefits created under President Trump’s Tax Cut and Job’s Act of 2017. The Act makes the QOZ capital gains deferral benefit (originally set to expire in 2026) permanent. It also beefs up the reporting requirements for QOZs. The 2026 sunset of the original capital gains deferral benefit deterred many from exploring QOZ investments. As a permanent measure, the provisions will be more useful to real estate investors.
Qualified Opportunity Zone Designation. Under the Act, every 10 years, state governors will propose new qualified opportunity zones, and the Treasury Secretary will certify these zones. Once certified, each census tract will remain a QOZ for 10 years beginning January first of the following year. The Act tightens the rules around which census tracts can qualify as a QOZ. The original law allowed a census tract to be part of the QOZ if it had a poverty rate of at least 20% or median family income did not exceed 80% of the applicable state or metropolitan area median family income. Under the Act, census tracts will qualify as QOZs only if median family income does not exceed 70% of the applicable state or metropolitan area median family income. The alternative 20% poverty rate test from the original rules remains but is limited by an “anti-gentrification” rule that disqualifies applicable census tracts if median family income exceeds 125% of applicable state or metropolitan area median family income. The Act eliminates the designation of tracts contiguous with low-income communities as QOZs. It also repeals the designation for all low-income communities in Puerto Rico.
Tax Benefit to Qualified Opportunity Funds. Under the Act, Taxpayers who reinvest gains from the sale of other investments (including stock) in Qualified Opportunity Funds (“QOFs”) can elect to defer their gains for five years (or if earlier, the year of the QOF disposition). QOFs are funds that invest in the QOZs described above. The Act also allows the deferral of $10,000 of ordinary income by reinvesting such income in a QOF. If the taxpayer holds the investment in a QOF for at least five years, their deferred gain is reduced by 10%. The deferred gain is reduced by 30% if the taxpayer invests in a newly-designated qualified rural opportunity fund.
The Act extends the original law’s tax exemption related to future gains from the sale of a QOF investment. The original rule applies: if a taxpayer holds his investment in a QOF for at least 10 years, the taxpayer will have no further gain (other than the deferred rollover gain) on the subsequent sale of the investment property. If a taxpayer holds his investment in a QOF for 30 years or more, the taxpayer’s gain is limited to the excess of the fair market value of the investment on the date of sale over the fair market value of the investment on the 30th anniversary of the date of investment.
Enhanced Reporting. The Act requires annual information reporting by QOFs and qualified rural opportunity funds. The disclosures include: the value of assets held and the value of QOZ property held; detailed information about investments in QOZ stock or QOZ partnership interests, such as the number of residential units for real property holdings; and average monthly number of full-time equivalent employees for QOF trades or business in which the QOZ business property is held.
The Act also requires disclosures to QOFs from specified QOZ businesses and qualified rural opportunity businesses: (i) those that are a trade or business of the QOF; (ii) those in which the QOF holds QOZ stock, or (iii) those in which the QOF holds a QOZ partnership interest. The law defers to the Treasury to craft regulations facilitating such disclosures to inform the QOF of details of the aggregate value and other information concerning the investments and the number employees of the businesses.
The Act imposes penalties for failure to file these new returns of up to $10,000 for QOF returns and $50,000 for large QOF returns.
Together, the 30 pages devoted to QOFs/QOZs provide a permanent avenue for tax breaks with real estate investments in economically disadvantaged areas. It will take time to see how investors take advantage of these provisions given the increased limitations on the investments and the additional reporting requirements. The permanence of the provisions should entice new investors.
New Markets Tax Credit
The Act permanently extends the New Markets Tax Credit and allows for a five year carryover of unused tax credit limitation.
Taxable REIT Subsidiary
The Act increases the limitation on the value of a taxable REIT subsidiary to 25% of the REIT’s total assets from 20%.
Upshot
The Act expands the real estate tax incentives in the U.S. tax code, with a renewed and beefed up focus, in particular, on Qualified Opportunity Zones and related Qualified Opportunity Funds. The Qualified Opportunity Zone changes generally take effect on January 1, 2027. The Low Income Housing Tax Credit, New Market Tax Credit, and taxable REIT subsidiary rules take effect on for tax years after 2025.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice.
Sandra is a member of the firm’s Corporate Group and an accomplished tax lawyer, who advises on matters pertaining to federal income tax in corporate mergers, acquisitions, joint ventures and planning initiatives, including the structuring of cross-border and IP buy-in transactions. Sandra’s bio can be found here.