Making the Most of OBBBA: Strategic Tax Moves for Real Estate Funds and Investors

When OBBBA first passed through Congress, I broke down its broad implications for fund sponsors, in Real Estate's Rollercoaster: How the "One Big Beautiful Bill Act" Flips the Script for Fund Sponsors. 

But now that the dust has settled and the legislation is moving toward final implementation, I'm seeing fund managers and investors asking more specific questions: How exactly do I capture these benefits? What does this mean for my next acquisition? How should I communicate these changes to my limited partners?

Those are the questions that separate successful fund managers from those who leave money on the table.

To answer such questions, I’m writing this blog, not as another high-level policy analysis, but rather a practical roadmap for fund managers and sophisticated investors who want to turn OBBBA's opportunities into actual returns.

I've structured this guide to work for both general partners looking to optimize their fund strategies and limited partners trying to understand how these changes affect their investment outcomes. 

Let’s start with the provision that offers the most immediate tax impact for real estate funds, one that could reshape how deals are structured and marketed.

Impact on Real Estate Funds

Permanent 100% Bonus Depreciation

The return of 100% bonus depreciation (and its permanence) is arguably the most impactful provision for real estate funds.

Essentially, this rule lets funds immediately deduct the full cost of qualifying property in the year it's placed in service, rather than spreading those deductions over decades. For funds acquiring or renovating assets, this is a huge boost to upfront tax efficiency.

Where This Gets Powerful: Cost Segregation Integration

The real magic happens when you pair bonus depreciation with cost segregation studies. These studies break out property components into categories that qualify for shorter depreciation lives:

• 5-year assets: Appliances, carpeting, decorative lighting
• 7-year assets: Office furniture, equipment, certain fixtures
• 15-year assets: Site improvements, landscaping, exterior lighting

Under bonus depreciation, all of those shorter-lived assets can be deducted immediately.

In many cases, this can mean writing off 20–30% of a property's purchase price in year one.

Real-World Impact: Say you acquire a $10 million apartment complex. A cost segregation study might identify $2.5 million in qualifying assets. Under the old phased-down rules, you'd deduct maybe $1 million in year one. Now? You can write off the entire $2.5 million immediately.

From my experience working with funds across different strategies, this level of immediate deduction can completely offset taxable income for early years of a deal and significantly boost investor returns.

Capital Raising Advantages

For funds targeting value-add or opportunistic strategies, this provision creates several competitive edges:

• Attracts tax-sensitive high-net-worth investors
• Generates meaningful K-1 losses that investors value
• Improves after-tax IRR calculations in marketing materials
• Provides flexibility for managing investor tax timing

Of course, it's not without trade-offs. Accelerating depreciation lowers the property's tax basis, which may result in larger gains on exit. But I've found most experienced funds can manage that through installment sales, 1031 exchanges, or reinvestment into Opportunity Zones.

Plain Talk: This provision is like getting a massive tax deduction upfront instead of waiting decades to claim it. It puts more cash in investors' pockets early and makes cost segregation studies almost mandatory for competitive funds.

While bonus depreciation covers large-scale deductions, another tool has quietly become more powerful under OBBBA, especially for mid-sized projects and targeted improvements.

Section 179 Expensing Limit Increase

Section 179 has always been useful, but with OBBBA increasing the cap to $2.5 million and the phase-out threshold to $4 million with complete phaseout at $6 million, it's now meaningfully more relevant for real estate operators.

Key Differences from Bonus Depreciation

Unlike bonus depreciation's broad application, Section 179 works best for targeted deductions:

• HVAC system upgrades
• Security equipment installations
• Roofing improvements on non-residential property
• Technology infrastructure investments, like alarm systems

Note, if the property is used for both business and personal purposes, the deduction must be prorated based on the percentage of business use, with at least 50% business use required to qualify.

This is especially useful in smaller-scale projects or years where total capex isn't massive. If a fund does a mid-year retrofit of a mixed-use building, for instance, it might not trigger a full-blown cost seg. But using Section 179 to deduct the full amount of specific qualifying improvements is simple and immediate. It's particularly handy for office, retail, or industrial properties that need periodic upgrades for tenants.

The Critical Limitation: Section 179 is tied to taxable income, meaning if the fund or underlying property is showing a loss, the deduction may be deferred. But when timed well with stable, cash-flowing assets, it's an effective lever to fine-tune tax exposure.

Plain Talk:

Think of this as the precision tool, while bonus depreciation is the sledgehammer. Both have their place in a smart tax strategy. The combination of bonus depreciation and Section 179 gives asset managers more tools to match deductions with deal timing and tax objectives. 

Used together, they allow real estate funds to manage taxable income more intentionally across the hold period, whether that’s shielding distributions or limiting phantom income that would otherwise pass through to investors.

Of course, deductions are only part of the equation. For leveraged deals, interest expense treatment plays a major role, and OBBBA just made a significant fix.

Relaxed Business Interest Deduction Limitation

The shift back to an EBITDA-based limitation on business interest deductions feels like a return to sanity for most real estate operators. Since 2022, I've watched funds struggle with a tighter EBIT-based limit that didn't allow depreciation and amortization deductions to factor into the interest cap.

This created several real headaches, especially in the early years when real estate projects showed low EBIT due to large non-cash deductions:

• Disallowed interest that carried forward even when deals were losing money on paper
• Confusing K-1 positions where investors saw taxable income from "loss-making" deals
• Unpredictable tax outcomes that made deal structuring more complex
• Investor communication challenges explaining why profitable-looking tax positions emerged from underwater projects

OBBBA's EBITDA-Based Solution

By allowing up to 30% of EBITDA as the benchmark, funds can now deduct more interest expense consistently. This is particularly valuable for deals that rely heavily on leverage:

• Ground-up developments with heavy upfront interest costs
• Transitional assets requiring significant capital improvements
• Bridge-financed portfolios with short-term high-leverage strategies

Important Technical Nuances to Understand

The relief comes with some new complexity that sophisticated fund managers need to navigate:

Capitalized Interest Limitations:

• The Act limits the ability to sidestep §163(j) by capitalizing interest
• Capitalized amounts now count toward the limitation
• This affects how funds can structure development financing

BEAT Implications:

• Application of §163(j) to capitalized interest may have Base Erosion and Anti-Abuse Tax consequences
• Particularly relevant for funds with intercompany financing structures
• Requires careful coordination with international tax planning

From my experience working with fund managers through this transition, the practical advantages are significant:

For Fund Operations:

• More consistent and predictable taxable income across fund lifecycles
• Reduced need for complex interest carryforward tracking
• Greater flexibility in leverage strategies without tax penalties

For Investor Relations:

• Simplified K-1 explanations and fewer confusing positions
• Fewer add-backs and deferred interest schedules to explain
• More straightforward narrative around deal performance vs. tax positions

Strategic Impact for Fund Structuring

This provision fundamentally changes how I approach capital stack design. Knowing that interest is now more likely to be deductible allows for:

• Enhanced preferred equity structures with more confidence in tax treatment
• Subordinated debt tranches that don't trigger unexpected tax surprises
• More creative capital stacks without worrying about interest limitation complications
• Bridge-to-perm financing strategies with better tax predictability

Plain Talk: Your interest deductions just got bigger, your tax filings got simpler, and your investor communications became much easier to explain. It's a rare win-win-win in the tax code.

Beyond fund-level tax strategy, OBBBA also introduces provisions that could shift how projects get built, including how you manage construction timelines and labor costs.

No Tax on Overtime

As real estate funds continue to scale up complex developments, labor-intensive phases like site prep, framing, and finish work often require substantial overtime to meet deadlines.

OBBBA introduces a temporary but potentially impactful overtime pay deduction for qualifying workers, offering a dollar-for-dollar deduction on up to $12,500 ($25,000 for joint filers) in overtime wages between 2025 and 2028. 

Potential Impacts on Fund Operations

With the possibility of overtime labor being partially shielded from tax, you might notice the following: 

• Contractors may adjust pricing structures
• Usage of overtime labor becomes more financially viable
• Project delivery timelines could accelerate
• Labor cost forecasting needs updating

Implementation Challenges to Consider

However, the deduction isn't automatic or universal. It phases out for higher-income earners, requiring careful coordination:

• Employers must designate overtime wages on W-2s
• Funds using external construction crews need tighter payroll oversight
• Compliance mistakes could disqualify workers from benefits, possibly souring labor relations
• May require updates to contractor agreements

While this tax relief doesn't go directly to funds themselves, the downstream effects on wage structures, project pacing, and workforce availability could subtly reshape how real estate funds schedule and staff their builds. Understanding and planning for these ripple effects now may give savvy fund managers a leg up in competitive bidding and project delivery.

Plain Talk: Faster builds equal faster cash flows and earlier lease-ups. If your projects run on tight timelines, this provision could be a quiet game-changer.

Permanent Opportunity Zones (OZs)

This is where OBBBA moves from incremental improvement to strategic transformation. Making Opportunity Zones permanent eliminates the uncertainty that I've seen cause many funds to delay new OZ platform launches. Previously, the looming sunset caused some funds to hesitate and delay the launch of new OZ platforms. That uncertainty is now gone, unleashing previously dry powder.

The Core OZ Benefits Remain Powerful

• Defer capital gains from other investments
• Roll gains into a Qualified Opportunity Fund
• Hold for 10+ years, and appreciation becomes tax-free

Real estate funds that focus on development or heavy repositioning, especially in emerging neighborhoods, are a natural fit for this strategy. With more predictable rules and a permanent timeline, funds can structure multi-cycle OZ vehicles with confidence.

Enhanced State Authority and Geographic Flexibility

The new legislation also allows states increased authority to designate and revise OZ tracts, which could help address criticisms that the original zones didn't always align with community needs. For funds, that means a broader canvas to work from, especially in states that are proactively managing their zone maps. Urban infill projects, affordable housing, and community-based commercial assets are all strong candidates.

Major Innovation: Qualified Rural Opportunity Funds (QROFs)

The bill introduces a new class targeting rural communities with enhanced benefits:

• 30% basis step-up after 5 years (triple the standard 10%)
• More flexible "substantial improvement" test requiring only 50% reinvestment
• Expanded geographic opportunities in underserved markets
• Enhanced tax perks for agribusiness and regional manufacturing

For funds looking to expand into agribusiness, regional manufacturing, or smaller-town revitalization, QROFs open up a new frontier, with bigger upside and lower structural friction.

Important Changes to Understand

Timeline Modifications

• Rolling 5-year deferral for each new investment (replaces hard December 2026 deadline)
• 10% basis step-up now the maximum (15% benefit for 7-year hold eliminated)
• Future-proof structure with no sunset anxiety

This creates a more fluid, future-proof timeline and ensures that investors in 2027 or 2037 can still unlock the benefits, with no sunset clock ticking down.

Increased Accountability Requirements

The trade-off for permanence is rigorous reporting:

• Asset valuations and census tract details
• Job creation and property ownership tracking
• NAICS codes and impact measurements

However, non-compliance can trigger penalties of up to $50,000 per return, requiring the need for operational discipline. I expect most sophisticated funds will view this administrative burden as worthwhile for long-term tax-free growth potential.

Still, investors and managers should be aware of the added compliance and reporting that's coming with the OZ extension. There will likely be more rigorous impact tracking, transparency requirements, and perhaps even caps on certain asset classes. But overall, the trade-off is worth it: long-term tax-free growth in real estate, with a policy tailwind behind it.

Plain Talk: OZ investments just became a permanent part of the tax code instead of a temporary experiment. That changes everything for long-term fund strategy.

From the Investor Lens

So far, we’ve looked at OBBBA from the fund sponsor’s perspective. But the changes also carry major implications for K-1 investors, particularly those focused on after-tax yield and generational planning.

Permanent 20% QBI Deduction

For K-1 investors with substantial pass-through income, the permanent extension of the 20% Qualified Business Income (QBI) deduction is a foundational win. Originally introduced in the 2017 tax reform, QBI has become a go-to lever for reducing taxable income from real estate and other qualifying businesses.

Now that the deduction is permanent, and paired with softer phase-out rules, more investors can benefit longer, thanks to:

• Higher income thresholds
• Inflation indexing
• Guaranteed minimum deductions (e.g. $400 for $1,000+ in QBI)

In many real estate partnerships, QBI reporting is already embedded into the K-1, so this becomes a set-it-and-forget-it tax benefit that flows straight to the investor’s return.

Why It Matters

• Stabilized assets: As depreciation phases out over time, QBI helps maintain tax efficiency.
• Predictability: With fewer phase-outs and clearer rules, planning gets easier.
• Low-income years: Even investors with modest income levels get a baseline deduction.

Plain Talk: Even in a “quiet” year, you still get a little tax break. In bigger years, the savings are real and automatic.

Increased Estate and Gift Tax Exemption

The OBBBA increases the federal estate and gift tax exemption to $15 million per individual starting January 1, 2026 (and indexed annually for inflation). The Generation-Skipping Transfer (GST) tax exemption rises to match, creating expanded room for long-term, tax-advantaged wealth planning.

The 40% estate/gift tax rate remains unchanged, and not all states will conform, so state-level planning still matters.

Key Investor Takeaways

• Bigger transfer windows for LP interests
K-1 investors with significant fund positions can now gift or transfer larger ownership stakes without triggering immediate tax.

• Early-stage investment advantage
When interests are still illiquid or discounted (e.g., development-stage projects), valuation discounts can enhance transfer efficiency and estate planning leverage.

• Stronger family office alignment
Multi-generational investing becomes more seamless. Families can co-invest across funds and hold assets longer without estate-related pressure to liquidate.

What Sponsors Should Watch

With more LPs moving interests into SLATs, GRATs, IDGTs, or other estate-planning vehicles, sponsors may need to revisit:

• Voting rights (especially in closely held funds)
• Transferability language in the LP agreement
• Successor communication protocol

Fund managers should also stay attuned to beneficial ownership rules as they evolve, especially if trusts are holding larger slices of capital.

Strategic Implications

This provision enhances the attractiveness of real estate funds as dual-purpose vehicles:

• For tax-efficient income generation
• For intergenerational asset transfer

When paired with QBI, bonus depreciation, and OZ strategies, the estate exemption increase creates a compelling trifecta for long-horizon investors.

Policy Watch:
These favorable conditions could shift with future administrations or budget negotiations. High-net-worth individuals and family offices may want to act sooner rather than later to take full advantage of the expanded exemption before political winds change.

Plain Talk:
More investors are planning for legacy, and real estate funds are now a central tool in that strategy. Sponsors who understand this shift (and plan for it in their docs) will be ahead of the curve.

SALT Deduction Cap Raised

One of the most headline-grabbing OBBBA updates? The State and Local Tax (SALT) deduction cap just got a massive facelift. The new law raises the cap from $10,000 to $40,000 for households earning under $500,000, with a gradual phase-down above that threshold (but never below $10,000). Both the cap and income limits will increase by 1% annually through 2029.

Why This Matters for K-1 Investors

Many real estate investors (especially those in high-tax states) feel the SALT pain most acutely during:

• Stabilization years (when income begins showing on K-1s)
• Exit years (when gains are realized and taxable)

The new $40K cap allows a larger chunk of those state taxes to be deducted at the federal level, reducing total tax drag on distributions, capital gains, and ongoing yield.

Real-World Planning Impacts

• High-tax state investors benefit most
Especially in states like California, New York, and New Jersey, where state rates are high and real estate income is significant.

• Smoother treatment for retirees & low-expense investors
Investors nearing retirement or with fewer offsetting deductions get meaningful relief under the higher cap.

• More strategic room for trusts and family structures
The expanded cap allows greater flexibility when coordinating deductions across multiple entities or trusts.

• PTETs still matter
For high-income investors above the phase-out range, Pass-Through Entity Tax elections (PTETs) remain a crucial planning tool.

Fund-Level Strategy

Fund sponsors should model how the timing of income events, distributions, capital events, or refis, interacts with SALT deduction shifts. The interplay between entity-level taxes and individual SALT caps will shape net after-tax yield, especially for:

• Older LPs
• LPs in complex trust structures
• Investors holding multiple fund positions simultaneously

Plain Talk:
If your tax bill from your state feels painful, this raises the ceiling. More of your money stays in your pocket, even in years when your fund income jumps.

Excess Business Loss (EBL) Limitation

The OBBBA locks in one of the more technical but impactful tax rules for real estate investors: the Excess Business Loss (EBL) limitation. Originally set to expire after 2028, this restriction is now permanent.

For K-1 investors in highly depreciated or value-add real estate deals, this change affects how and when the tax benefits of losses are realized.

What the Rule Does

The EBL rule limits how much business loss a noncorporate taxpayer can deduct in a given year. For 2025:

• Joint filers can deduct up to approximately $600,000 in net business losses
• Single filers are capped at around $300,000

Any excess losses cannot offset other income, such as wages or capital gains, in the current year. Instead, they convert into a net operating loss (NOL) that carries forward for future use.

This applies to all business losses, whether from actual operational deficits or paper losses created through bonus depreciation and cost segregation.

Investor Implications

Losses are delayed, not denied
These deductions are not lost. They are simply deferred. This shifts the timing of tax benefits but preserves their overall value.

Bonus depreciation remains valuable, just over time
Funds that generate large first-year K-1 losses through cost segregation may still pass those losses to investors, but under EBL rules, many high-income investors will not be able to apply them immediately.

Strategic NOL planning becomes more important
Investors with multiple properties or long-term passive income streams can still benefit by matching these deferred losses to future gains.

Planning Considerations for Fund Managers

Fund sponsors should:

• Set expectations with LPs early, particularly in marketing and onboarding materials
• Model multi-year tax impacts so LPs understand when and how deductions can be used
• Focus communications on total tax efficiency across the life of the investment, not just the first year

While the EBL rule changes the timeline, it does not eliminate the value of real estate’s tax advantages.

Plain Talk:
You still get the tax break, just not all at once. The savings are real, but they may show up a few years down the line.

Strategic Implementation: Turning Policy Into Performance

The OBBBA creates powerful tax opportunities, but capturing them takes more than awareness. The rules are complex, the timelines are tight, and the cost of missteps can be high. Strategic execution is the difference between benefiting on paper and realizing real investor returns.

At SponsorCloud, our team has supported more than 1,000 fund managers representing over $10 billion in investor capital. Our integrated tax planning approach has increased after-tax IRRs by up to 2.5% for clients who implement these strategies effectively.

Based on the 2025 law, here’s where we are advising clients to focus first:

For Sponsors and Asset Managers

• Accelerate cost segregation studies
  The five-year window for 100 percent bonus depreciation creates urgency. Prioritize engineering-based cost seg analyses on any qualifying acquisitions or renovations.
• Re-underwrite tax impacts at the deal level
  Adjust pro forma modeling to reflect restored bonus depreciation, the EBITDA-based interest deduction limit, and updated Section 179 parameters. Even stabilized deals may see material changes in projected after-tax returns.
• Educate LPs on key tax interactions
  Help investors understand how QBI, EBL, and SALT rules affect the timing and visibility of their returns. Clear communication builds confidence and prevents misalignment around K-1 results.

For K-1 Investors

• Coordinate with your tax advisor
  Map out how depreciation, QBI eligibility, and NOLs fit into your broader portfolio and income profile. Some benefits are immediate, others unfold over time, but all require informed positioning.
• Factor tax law into investment timing
  The new SALT cap and estate exemption rules may shift how and when you commit capital. Pairing these changes with fund investment windows can enhance tax efficiency across generations.

In closing, OBBBA represents more than a set of tax tweaks. It is a fundamental realignment of the real estate investment landscape, and a call to act strategically before the window narrows.

Final Thoughts

The 2025 OBBBA tax reforms represent more than a policy update. They are a realignment of the tax code in favor of long-term investment, income efficiency, and strategic wealth planning.

Funds that move decisively will not only optimize returns for their investors but also differentiate themselves in a more tax-aware capital environment. This is the moment to rethink structures, reframe conversations, and revisit planning assumptions across the fund lifecycle.

If you're ready to translate policy into performance, we can help.

Schedule a Consultation to see how SponsorCloud can support your OBBBA strategy, from modeling to execution.