With House Resolution 1 (the Act) recently signed into law, there are several key changes with various tax benefits affecting real estate investment trusts (REITs) and the real estate industry. This article will highlight certain parts of the legislation, including an increase in the limitation on taxable REIT subsidiary (TRS) assets, Section 199A qualified business income (QBI) deductions, adjusted taxable income (ATI), 100% bonus depreciation, and the §162(m) aggregation rule.
Increase in Limitation on TRS Asset Holding by REIT
Effective for taxable years beginning after December 31, 2025, the limitation on the value of TRS securities a REIT can hold increases from 20% to 25%. This change provides more flexibility for REITs to generate additional tenant service income and/or invest in more assets with the intent to sell within a short-term period.
Section 199A QBI Deduction
Section 199A QBI deduction, previously scheduled to expire for tax years beginning after 2025, becomes permanent under the Act. Investors in REITs may continue to benefit from this 20% QBI deduction on their REIT dividends, potentially reducing their effective tax rate.
Section 163(j) Limitation – Adjusted Taxable Income
The definition of ATI is once again based on earnings before interest, taxes, depreciation, and amortization (EBITDA), applicable for tax years beginning after December 31, 2024. Previously, the ATI was based on EBIT, an amount after depreciation and amortization. The more favorable ATI calculation under the Act would increase the limitation on the business interest deduction, allowing more tax deductions in the year incurred.
Bonus Depreciation – Back to 100% Expensing
The bonus depreciation was previously set to fully phase out after tax year 2026. The Act permanently restores the bonus depreciation, generally allowing a 100% deduction on qualified property acquired after January 19, 2025.
Qualified Production Property 100% Depreciation
The Act generally also allows 100% depreciation on qualified production property in the year placed in service. The property must be in the U.S. or U.S. territory and be used for a qualified production activity such as manufacturing, production, or refining of qualified product. This provision is temporary, applicable generally to qualified production property placed in service before tax year 2031, and the construction must start after January 19, 2025 and before January 1, 2029.
Section 162(m) Aggregation Rule for Executive Compensation Deduction Limit
The scope of entities subject to the §162(m) Aggregation Rule is expanded to also include all members of a covered corporation’s controlled group and affiliated service group. If total compensation from such members to a specified covered employee exceeds $1 million, then the allowed tax deduction gets limited to $1 million. This new broader aggregation rule may place more businesses under § 162(m), thus significantly disallowing tax deductions. The change is in effect for tax years beginning after 2025. Those corporations with highly compensated executives should check whether §162(m) limitation applies.
It is important for real estate funds and operators to be aware of potential tax planning opportunities resulting from legislative changes such as the Act. If you have any questions or would like more information on our real estate services, please reach out to a professional at Forvis Mazars.