T
he recent signing of House Resolution 1 (the Act) into law has introduced significant changes to tax benefits affecting real estate investment trusts (REITs) and the broader real estate industry. This article highlights key aspects of the legislation, including increased flexibility for REITs, enhanced deductions, and adjustments to executive compensation rules.
The limitation on taxable REIT subsidiary (TRS) assets will increase from 20% to 25%, effective for tax years beginning after December 31, 2025. This change enables REITs to generate more tenant service income or invest in short-term assets with greater ease.
Section 199A qualified business income (QBI) deductions have been made permanent under the Act, allowing investors in REITs to continue benefiting from a 20% QBI deduction on their dividends, potentially reducing their effective tax rate.
The definition of adjusted taxable income (ATI) will revert to earnings before interest, taxes, depreciation, and amortization (EBITDA), applicable for tax years beginning after December 31, 2024. This change increases the limitation on business interest deductions, allowing more tax deductions in the year incurred.
Bonus depreciation has been permanently restored, generally allowing a 100% deduction on qualified property acquired after January 19, 2025. Additionally, 100% depreciation will be allowed on qualified production property placed in service before tax year 2031, provided construction starts after January 19, 2025, and before January 1, 2029.
The scope of entities subject to the §162(m) Aggregation Rule has been expanded to include all members of a covered corporation's controlled group and affiliated service group. If total compensation from such members exceeds $1 million for a specified covered employee, the allowed tax deduction will be limited to $1 million, effective for tax years beginning after 2025.
Real estate funds and operators should be aware of potential tax planning opportunities arising from these legislative changes. For more information on real estate services or to discuss how these changes may impact your business, please consult a professional at Forvis Mazars.
