A Real Estate Perspective on the Tax Cuts and Jobs Act Sunset
NOTE: Courtney is posting this blog on behalf of the author: Max DeBroff.
When the Tax Cuts and Jobs Act (TCJA) was passed in December 2017, it turned the real estate industry on its head, adding numerous provisions that greatly impacted the industry. Learning and applying the new tax law was top of mind — and the sunset in 2025 was a distant thought.
Now, with the sunset of many TCJA provisions occurring at the end of 2025 and uncertainty regarding new tax legislation in the current political landscape, tax planning for these changes is more important than ever.
The lifetime gift and estate tax exemption
The TCJA more than doubled the lifetime gift and estate tax exemption, changing the lifetime exemption from $5.49 million in 2017 to $11.18 million in 2018. The current lifetime gift and estate exemption for an individual taxpayer is $13.61 million.
At the end of 2025, this is set to be cut in half — and there is no guarantee the exemption will ever be this high again. Gifting real estate to the next generation of family is a common tax planning tool to avoid estate taxes, and the opportunity may never be greater than it is right now. We recommend talking with a tax and estate planning advisor to discuss specific strategies.
Qualified business income deduction
The qualified business income deduction (QBI) was enacted with the TCJA and was a major benefit to business owners that operated a trade or business through a partnership, LLC, or S-corporation. QBI allows a 20% deduction on all trade or business income, with some limitations based on W-2 wages and property purchased. This deduction significantly decreased the effective tax rate that small business owners were paying on income from pass-through entities.
Many owners of real estate operate through an LLC, so the real estate industry saw a significant benefit from this. At the end of 2025, this deduction is set to sunset, which would increase the effective tax rate incurred by small businesses and many real estate owners. One tax planning consideration could be to accelerate income into 2025 to use the lower effective tax rate from the QBI deduction.
Bonus depreciation
The TCJA extended 100% bonus depreciation through the end of 2022 — and this deduction began to phase out in 2023 by lowering the deduction from 100% to 80%. The deduction will continue to decrease by 20% each year until it is fully phased out by 2027. Consider identifying future large projects and potentially accelerating them forward to use the higher bonus depreciation.
State and local tax deduction — $10,000 cap
The TCJA capped the state and local tax (SALT) deduction at $10,000 per taxpayer. This gave rise to the pass-through entity tax (PTE) elections that many states implemented to allow for the full benefit of SALT paid from pass-through income. Since many owners of real estate receive the majority of their income (and pay the majority of their taxes) from pass-through entities, making the PTE election on their state tax returns has provided significant federal tax benefits.
With the SALT cap set to expire at the end of 2025, consideration should be given to PET elections in 2026, which could impact estimated tax payments as early as April 2025.
Provisions impacting real estate not expiring
While many TCJA tax provisions are set to expire at the end of 2025, a few that have a significant impact on the real estate industry are not. One of these is the business interest expense limitation. Since business interest expense is one of the most common (and largest) deductions used by real estate entities, this had significant ramifications. This limitation is not set to expire and will continue to be in effect after 2025.
The corporate tax rate was adjusted in 2017 from 35% to 21%. This provision of the TCJA is also not set to expire and will remain at 21%. With the QBI deduction set to expire and the corporate tax rate remaining at a historically low level, the opportunity to restructure pass-through businesses as C-corporations could result in lower effective tax rates.
How we can help
While it remains uncertain whether there will be an extension of some or all the above provisions of the TCJA, the current law cannot be ignored, and it is prudent to plan accordingly. With a deep knowledge of the real estate industry and experience with a changing tax landscape, our professionals can help create a personalized plan that fits your business.
Courtney is a Tax Principal in CLA's Real Estate industry group and has more than 17 years of experience providing accounting, tax and consulting services to real estate owners, operators and developers. She also consults with high net-worth individuals and owners of closely-held businesses on all aspects of tax planning.
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