In a close call, the U.S. House of Representatives passed the latest tax reform package, officially titled the One Big Beautiful Bill Act, though critics refer to it as a “Debt Time Bomb.” After an all-night session, the sweeping tax and spending package declared a win by a razor-thin margin vote of 215-214. House Republicans implemented several last-minute modifications to the legislation that swayed opposing groups within the GOP, and now, with a win in hand, the bill ships off to the Senate for further scrutiny.
The bill passed even while sporting obvious fiscal red flags, as pointed out by Congressman Thomas Massie, who tweeted, “The Big Beautiful Bill will add $20 trillion of federal debt over 10 years, and that’s according to the authors of it. But there’s another huge problem; it will increase the price of the $36 trillion of debt we already have, as bond buyers realize we aren’t fiscally responsible.”
Related Article: A Ticking Time Bomb – National Debt Growing by $1 Trillion Every 100 Days
Although the tax reform bill displays serious fiscal concerns, it does, however, reflect a few key victories for the real estate sector. Tyler Davis, president of Saunders Real Estate, calls out this win by stating that the House bill is “very pro real estate on several fronts; I think it will do a lot to incentivize investment and new projects.”
Key legislation in the bill that would be of interest to property investors include 100% bonus depreciation, the qualified business income deduction (QBI), and 1031 like-kind exchanges.
Legislation Includes Restoration of 100% Bonus Depreciation
The legislation includes an amended bonus depreciation provision that reinstates, retroactively, 100% first-year depreciation for eligible properties that are obtained and placed in service after January 19, 2025, and before January 1, 2030.
While the Tax Cuts and Jobs Act originally introduced the “100%” aspect of bonus depreciation for qualified property placed in service between September 28, 2017, and December 31, 2022, under current Code Sec. 168(k), that generous first-year depreciation has been phasing down annually by 20% increments. It’s currently at 40% and is set to reach zero in 2027. The proposed legislation would halt the phase-out process and bring back 100% expensing for capital investments.
100% bonus depreciation is a powerful tax incentive, and if reinstated, it will allow real estate investors to immediately deduct the entire cost of certain eligible components within their rental properties rather than spreading those deductions over the life of the property.
The Tax Reform Package Protects 1031 Like-Kind Exchanges
Because a 1031 has often been viewed as a loophole used to defer taxes, it’s been under attack by previous presidential administrations, even calling for its elimination altogether. The perceived loophole exists when an investor sells a property and within an allowable timeframe, invests the funds from the sale into a like-kind property. In doing so, they are able to defer paying capital gains taxes on the investment property sold.
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- A Guide to Capital Gains Tax
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Both Republicans and Democrats who oppose this tax strategy seem to be unaware that it actually stimulates the economy, not only through real estate transactions but other investment sectors as well. The current tax reform package protects Section 1031 like-kind exchanges, encouraging continued investment in real estate markets while simultaneously promoting economic growth.
Those unfamiliar with 1031 exchanges should explore the following video or head over to our podcast episode on the Powerful Benefits of a 1031 Exchange.
Bill Proposes Permanent Increase to QBI Deduction
The qualified business income deduction (QBI) that currently allows up to a 20% deduction in business income, will permanently increase to 23% if the bill makes it past the Senate. Tyler Davis again weighs in, remarking, “That’s an extra 3% deduction that a lot of investors can receive on certain net income that comes from investments — whether that’s ground-up developments or new homes that are being constructed.” QBI deductions are intended to give a tax break to pass-through business owners in many sectors, and there are a substantial number of real estate industry professionals in this category.
A QBI deduction can keep thousands of dollars in an investor’s pocket. However, if a business is not set up as a pass-through entity, it won’t be eligible for this tax break. Those wishing to form a business entity for this reason, as well as to protect their assets, can obtain assistance from Rich Dad Advisor Garrett Sutton of Corporate Direct, who comes highly recommended.
Additionally, to maximize your tax burden, you’ll want to ensure you have a qualified tax expert on your side. Head over to the following article that contains tips for locating a professional certified public accountant – Finding the Right CPA for Real Estate Investors: What to Look For.
Tax Reform Bill Sets Real Estate Investors Up For Increased Profits
With the tax reform bill serving as a double-edged sword, meaning it has the capability of crushing the U.S. economy while, at the same time, providing financial gains for the real estate sector, it can certainly put investors at an advantage. If this bill, that’s referred to as a “Debt Time Bomb,” has the potential to cause financial ruin for the American people, it would be a wise decision to invest in rental real estate to safeguard your funds and grow your wealth. Unlike traditional retirement accounts that are tied to Wall Street, as well as savings accounts that diminish in value as inflation grows, rental real estate operates on a different playing field, disconnected and shielded from the volatile economy.
If you’re considering investing in the real estate market but you’re not sure where to start, feel free to schedule a complimentary call with our team. Our full-service real estate investment company builds new construction properties in lucrative housing markets. That said, we can help you get on the path to owning a cash flowing rental property that will build equity and yield monthly income for generations to come, no matter how much the economy deteriorates.
To hear more about the other side of this bill as it pertains to the fiscal red flags it presents, dive into the video below:
