Real estate tax changes that advisers need to understand

Sponsored by Thomson Reuters

Withum partner Brian Lovett, CPA, CGMA, J.D., is the guest on this week’s episode of the Journal of Accountancy podcast. Lovett is scheduled to speak at the AICPA Construction & Real Estate Conference in December on industry-specific impacts of new tax provisions in H.R. 1, P.L. 119-21, commonly known as the One Big Beautiful Bill Act.

He joined the podcast to preview some of those topics and explain the main way he separates fact from fiction when it comes to the details of H.R. 1 provisions.

What you’ll learn from this episode:

• What real estate professionals and advisers should know about the expansion of Sec. 179.
• The PDF on Lovett’s computer desktop that is “the one that matters.”
• The topic that is “one of the things we’re waiting on most” related to IRS guidance.
• One real-estate-related provision that could be easily misunderstood.
• The PTET SALT deduction’s effect on real estate companies.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: Hello, listeners and welcome to the Journal of Accountancy podcast. This is Neil Amato with the JofA. We’re going to talk tax provisions, specifically ones that relate to the real estate and construction industries, and you’ll hear that conversation right after this word from our sponsor.

[Sponsor message]

Welcome back. The AICPA Construction and Real Estate Conference is Dec. 8–10 in Las Vegas and online, and one of the speakers at that event is Withum partner Brian Lovett, who is our guest today on the show. Brian, thank you for being on the Journal of Accountancy podcast.

Brian Lovett: Thanks, Neil, and wonderful to be here and excited to discuss some of these key provisions.

Amato: Awesome. I have not done a full examination of the agenda for the conference, but my thought is your topic is probably going to be one of the event’s most popular. It’s about real-estate-related tax impact of provisions in H.R. 1, the new sweeping legislation. What’s a preview of a few of those provisions that you’ll discuss at the conference?

Lovett: I’m hopeful that it’s one of the most popular ones. It certainly is the one thing that seems to fill my inbox and my phone calls these days are questions about this bill. But it’s, as you mentioned, pretty broad, sweeping legislation. Again, I know it’s the real estate and construction conference. My focus is going to be a little more on the real estate side.

I’m going to really look at some of the new rules for depreciation. We had some provisions there that restore bonus depreciation, expand Sec. 179. I really want to talk to folks and let them know how they can implement those changes for the benefit of their clients.

We’re also going to look at some things like the new opportunity zone provisions that are renewed, expanded, made a permanent part of the Code. The old program is set to expire here in about a year, but the OBBBA creates an opportunity zone 2.0 that does allow investors looking to defer capital gains into underserved communities an opportunity to defer those capital gains further beyond what was the scheduled expiration of the program in 2026. We’ll look at those as well.

Amato: I’ll follow up on two of the things you said earlier because I think in doing my research for this episode, I see that you’ve been following the depreciation and Sec. 179 topics before. Do you want to go into what’s new about those, since it’s something I’ve already seen, I guess, some Withum videos with you in them about?

Lovett: It’s been a part of the Code. The special first-year depreciation or bonus depreciation as people would call it, have been part of the Code going back all the way to 2001. It’s been part of the fabric of the real estate industry to expect that when you place a new asset in service and you go through the process of doing a cost segregation study, there is going to be a substantial first-year deduction allowing those taxpayers to more quickly recover the cost of their capital improvement.

The Tax Cuts and Jobs Act passed in 2017, effective for 2018, did give us 100% bonus depreciation of that first-year expensing at 100% but had a phaseout in it. For the last few years, we’ve been watching that 100% expensing go from 100% to 80%. The pre-OBBBA provision for 2025 would have given us a 40% bonus depreciation, and then the taxpayer is left using the normal maker’s schedules to recover the other 60% of their improvement.

What OBBBA does is now restore that back at 100%, and that 100% is now permanent. We have some relative stability. We know what we can do to plan. There are a couple nuances around when the asset was acquired, when it was placed in service, and some planning opportunities relative to how much depreciation to take in 2025. But I do think that understanding that expanded bonus depreciation and the impact of that bonus depreciation is really important for practitioners as they’re advising clients here in 2025 and going forward.

Amato: As we’ve said, it is a huge piece of legislation. Are you just constantly going back and rereading, still digesting? Where do things stand with that?

Lovett: Yeah. So, 331 pages, I think, was the official page count. It is a PDF on the desktop of my computer. There are certain provisions where we’ve been through it a few times now, and I’m pretty comfortable with them.

But when you’re talking about a piece of legislation that is as big as this one is and what I would say is as broad-reaching as it is, understanding the interplay of all of those provisions and both consulting with clients inside the real estate industry and then outside the real estate industry. There’s a lot of provisions in this bill that really don’t impact the real estate industry as much, but they do impact our client base on a regular basis. Constantly going back to the legislative language, we’re constantly just double-checking everything because with something as big as it is, I don’t feel comfortable with every provision to the point where I can just shut it off.

I do keep it as a desktop item. It is right there and ready. It’s one click away. When we need to, we get right back into it. But certainly some of the provisions we’re pretty well versed in by now.

Amato: Sure. Related to real estate construction and you advising your clients, what are some of the provisions where you’re most seeking or awaiting guidance?

Lovett: Throughout the bill, there’s things that we’re looking for. There’s a lot within the bill — no tax on tips, no tax on overtime, more individual-type provisions that for some of our folks we’re waiting on guidance. Within the real estate space, I think one of the most interesting areas or one of the things we’re waiting on most is related to the opportunity zones.

Really understanding what regulatory guidance will become available to address some of the changes with respect to the opportunity zone 2.0 versus 1.0. We did get some guidance recently. One of the big changes with opportunity zones is they increase some of the incentives for rural investment, and those rural investment benefits are effective now, even though the new 2.0 is really not part of the Code until we get to 2026 and 2027.

But we’re starting to get a little bit of guidance trickling from the IRS on those provisions. But we wait for those, just want to see some of the guidance on the interest expense limitations and see if there’s going to be any change in the implementation there. We did have some change in the interest expense deductibility. There are constantly things we’re just waiting for a little more clarity and to make sure that, a provision, if it’s going to change, we get that guidance from Treasury.

Amato: One speaker at the November AICPA Tax Conference is Annette Nellen. She’s someone I talked to in late August about this law. She mentioned that she had not recalled a piece of legislation with more misinformation about it. What are you seeing on that front? Why is it different, if it is?

Lovett: I do see a fair amount of misinformation. To avoid getting too deep into it, I think the political environment in the country these days is just one where there’s just a lot of — it leads to a bunch of misinformation where people read headlines and grab headlines and overreact to the headlines.

But from a more fundamental tax, looking at some of these provisions, and I’m going to pick on one on qualified production property. There’s a provision in the law that says, if you place in service qualified production property, which is a building that is used to house a production facility here in the United States, there’s an opportunity to 100% expense the building.

Now, 100% expensing of building assets is not some that is traditionally in the Code, that is a pretty sizable benefit for those in that space. But what I find is that people see that as a clickbait headline somewhere on social media, deduct 100% of your building, and then we get a whole bunch of calls or my buddy told me that a guy told him at a bar, if I do this, I can deduct 100% of my building. Not just misinformation from a political perspective, but just on the untrained person who reads one thing or reads a headline or doesn’t fully digest the complexity of this law — 330 pages of complex tax legislation — I think it’s really important as a practitioner who’s advising our clients that we do have our full understanding of the legislation itself and can better derive and answer those issues.

But I’m seeing a lot of that, again, going back to some of these things on no tax on tips, no tax on overtime. “Well, now my overtime is tax-free” or “My tips are tax-free.” Not necessarily. There’s a lot of nuance to that. We’re seeing a lot of it. We’re answering a lot of questions. Again, as advisers, our best tool is the legislation itself and a full and thorough understanding of what’s in that legislation so we can better advise our clients because there is a lot of that “a guy told me.”

Amato: That PDF on your desktop is probably better than just about any other website out there.

Lovett: It’s the one that matters, to be honest with you.

Amato: Yeah, exactly. Now, one aspect of the law that the AICPA had a lot of interest in was the preservation of the state and local tax deduction for passthrough entities. We sometimes call it PTET SALT. Are the majority of real estate companies structured as passthrough entities, and if so, how are they affected?

Lovett: In my practice and I think probably most real estate deals that are done, the passthrough entity is used. It’s used for a whole lot of reasons, and there’s seminars upon seminars of why you would want to use a passthrough entity versus a corporate entity to do your real estate transactions. But the main driver of that is that the individual then receives the tax benefits or deductions, obviously subject to loss limitations.

As passthrough entities, the preservation of that PTET SALT, that deduction, that ability to elect into a program that will allow the entity to pay any state income taxes that are generated by the business is wildly impactful for those business owners. Obviously, the Big Beautiful Bill does give a little bit of a higher ceiling there for state tax deduction. What was capped at $10,000 under the TCJA is now increased to $40,000.

But once you start to get into the higher-echelon income, that 40 does phase back down to 10. The high-net-worth taxpayer is still going to benefit from making those passthrough entity deductions at the entity level, having that entity pay the tax, deduct the tax, allocate that credit to the owner, and so that was largely preserved, untouched. Actually, I wouldn’t say preserved. It was untouched in this new law.

Now, I know in negotiation, as this worked its way through Congress, there were proposals that would have then limited, I think they were called C-SALT, corporate tax limitations to mimic the individual-level deduction, but none of those made it into the final bill. We do have the ability for those entities to continue to elect into their state and local PTET regimes and then enjoy the benefits of that deduction at the federal level.

Amato: For the conference, again, Dec. 8–10, we will have a link in the show notes of this episode to the event, its agenda, registration details. Related to the conference or to anything else we’ve discussed, anything you’d like to add, Brian, in closing?

Lovett: I’ll put a little pitch in for the conference. I do a lot of speaking for the AICPA, and I get the opportunity to speak at ENGAGE at National Tax in November and now the opportunity to speak here in December. My warning would be that we’ve covered it. It’s complex legislation, but this complex legislation does present opportunities for us as advisers of our clients. I think it’s really important to get in front of folks who can help explain what’s in that legislation, fully understand it for yourself.

The AICPA conference is a great way to meet some of our peers and kick around ideas, ask questions, and get that guidance. But those are the ways that we’re going to be able to really help plan and guide our clients and help them thrive under these new rules. Because I think there’s a lot of opportunity there when we have a 331-page legislation that is relatively disruptive to the current tax regime.

Amato: That’s a great way to end. Brian Lovett, thank you very much.

Lovett: Thank you, Neil.