The One Big Beautiful Bill Act (OBBBA), passed in July 2025, introduced several real estate tax incentives that will influence planning opportunities for 2026 and beyond. Key changes include the return of 100% bonus depreciation, increased section 179 limits, a deduction for qualified production property, improvements to the Qualified Opportunity Zone (QOZ) Program, and the permanent extension of the section 199A deduction. These updates offer significant opportunities for real estate owners and investors to lower taxable income, enhance cash flow, and strengthen long-term tax strategies.
Permanent 100% Bonus Depreciation
The OBBBA permanently restores 100% bonus depreciation. Before the law passed, the deduction was scheduled to phase down to 60% in 2024 and 40% in early 2025. Under the final rules, the 40% rate applies only to property acquired and placed in service between Jan. 1, 2025, and Jan. 19, 2025.
What Bonus Depreciation Allows
Bonus depreciation allows you to deduct 100% of the cost of qualifying business property purchased and placed in service during the tax year. Qualifying assets generally include property with a recovery period of 20 years or less under the Modified Accelerated Cost Recovery System (MACRS), such as leasehold improvements, machinery, equipment, office furniture, fixtures, and computers.
While commercial and residential real estate must be depreciated over 39 and 27.5 years, respectively, certain components may qualify for bonus depreciation when reclassified through a cost segregation study.
Why Cost Segregation Matters
A cost segregation study helps you identify and reclassify property components into shorter recovery periods. The result is often significant upfront tax savings, improved cash flow, and greater flexibility to reinvest in your properties.
Increased Section 179 Deductions
Immediate deductibility of depreciable assets under Section 179 was also enhanced. The limits are increased from $1 million to $2.5 million, and the phaseout is increased from $2.5 million to $4 million, indexed for inflation. This is important for businesses in states that have decoupled from the 100% bonus depreciation provisions.
Qualified Opportunity Zones: Extended and Improved
Several updates strengthen and extend the QOZ Program. Established in 2018 under the Tax Cuts and Jobs Act, the program encourages investment in low-income communities and was set to sunset on Dec. 31, 2026. Under the updated framework, often called QOZ 2.0, the program becomes permanent beginning Jan. 1, 2027, providing long-term planning certainty.
Key Benefits for Investors:
- Five-year deferral of capital gains tax on initial investments
- A 10% step-up in basis on the original investment after five years
- Potential permanent exclusion of gains on appreciation for investments held at least 10 years
- A freeze on gain elimination after 30 years, with basis stepped up to fair value at the 30-year mark
The new law establishes qualified rural opportunity funds (QROZs) to promote investments in low-income rural areas. Investors in QROZs get a 30% step-up basis after five years instead of the usual 10%, providing a stronger incentive for rural development.
These improvements make opportunity zones an appealing choice if you want to defer or cut capital gains tax while promoting community revitalization.
New Deduction for Qualified Production Property
A new 100% deduction for qualified production property lets you fully expense certain nonresidential buildings used in production activities instead of depreciating them over 39 years.
To qualify, the property must be:
- Nonresidential real property that is not otherwise disqualified, e.g., offices, storage facilities, sales
- Used as a key part of a qualified production activity in the U.S. or its territories
- Originally utilized by the taxpayer
- Built between Jan. 20, 2025, and Dec. 31, 2028
- Placed in service before Jan. 1, 2031
Qualified production activity includes manufacturing, production, or refining of tangible personal property through significant transformation, such as agricultural or chemical processes. The IRS is expected to issue further guidance defining “substantial transformation.”
This temporary deduction could lead to substantial tax savings if you intend to build or enlarge a production facility in the upcoming years.
Section 199A Deduction Made Permanent
The OBBBA makes the Section 199A deduction for qualified business income permanent. Since its introduction, this deduction has provided significant tax savings for owners of pass-through entities. For example, a real estate taxpayer with $200,000 of qualified business income could be eligible for a $40,000 deduction.
Now that permanence is established, you should regularly review entity structures and eligibility criteria to keep maximizing this benefit.
Strengthen Your 2026 Real Estate Tax Strategy
These updates give real estate owners and investors new ways to accelerate deductions, lower taxable income, and gain long-term financial advantages. As you get ready for a new tax year, think about whether a cost segregation study, an opportunity zone investment, or the qualified production property deduction could help you achieve your strategic goals. Connect with a member of our real estate advisory team to discuss your 2026 planning opportunities.
Connect with a member of our real estate advisory team to discuss your 2026 planning opportunities.
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