Upcoming Tax Law Changes: What Real Estate Investors Need to Know

As 2024 draws to a close, forward-looking real estate investors may already have begun to prepare for a significant shift in the tax landscape. Unless Congress acts, several key provisions in the Tax Cuts and Jobs Act (TCJA) will sunset at the end of 2025, ushering in a new era of tax law changes for property owners and developers. Understanding these changes and planning accordingly is crucial if you want to maintain profitability and maximize the impact of your wealth transfer strategies.

It’s worth noting that this, of course, is an election year. Regardless of who wins the election, there will probably be some form of tax law changes passed in 2025 that will likely address many of the provisions discussed in this article. At James Moore, our professionals make it their mission to follow evolving tax legislation and advise our clients appropriately.

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Individual Tax Rate Changes

One of the most notable changes on the horizon is the increase in the top individual tax bracket. Currently set at 37%, this rate is scheduled to revert to its pre-TCJA rate of 39.6% in 2026. For real estate investors with high levels of personal income, this increase can significantly impact overall tax liability, especially when combined with other changes.

Many real estate investments are structured as pass-through entities, meaning the income flows directly to the individual’s tax return. As such, this increase will directly affect the after-tax profitability of many real estate ventures.

If possible, you may consider accelerating future income into 2025 (the last year the top ordinary income tax rate is scheduled to remain at 37%). Alternatively, explore real estate tax strategies that allow you to reduce this taxable income, such as real estate tax deferral strategies.

Standard Deduction and Itemized Deductions

The TCJA substantially increased the standard deduction, simplifying tax filing for many Americans. However, this provision is set to revert to pre-TCJA levels. When adjusted for inflation, this effectively cuts the standard deduction in half. For real estate investors, this change may renew the importance of itemizing deductions.

Simultaneously, the state and local tax (SALT) deduction cap of $10,000 is scheduled to be lifted. This could be particularly beneficial for investors in high-tax states like New York and California. Without the cap, investors may be able to deduct significantly more in property taxes and state income taxes, potentially offsetting some of the impact of other tax increases.

Consider a scenario in which you own multiple properties across different states. Currently, you might be limited in your ability to deduct property taxes due to the SALT cap. With the cap lifted, you could potentially deduct the full amount of property taxes paid across all your properties, significantly reducing your taxable income.

In light of these changes, it may be beneficial to reassess your property holdings in high-tax states. The ability to fully deduct state and local taxes could make investments in these areas more attractive from a tax perspective.

Qualified Business Income (QBI) Deduction

One of the most impactful changes for real estate investors is the scheduled expiration of the 20% Qualified Business Income deduction at the end of 2025. This deduction has been a significant tax benefit for many in the real estate industry. Its loss could effectively increase taxable business income by 20% for many investors. However, the actual impact will vary depending on the taxpayer’s overall tax situation and income level.

The QBI deduction is subject to limitations based on the type of business, W-2 wages paid and the unadjusted basis of certain property. Real estate investors should work closely with tax professionals to fully understand how these limitations apply to their specific situation.

As we approach 2026, it’s crucial to stay informed about any potential legislative changes that might extend or modify the QBI deduction. In the meantime, maximizing the benefits of this deduction while it’s still available should be a key consideration in your tax planning strategy.

Alternative Minimum Tax (AMT)

The alternative minimum tax thresholds are set to revert to pre-TCJA levels after 2025. This parallel tax system ensures high-income individuals pay a minimum tax, regardless of deductions and credits. With lower thresholds, more real estate investors may become subject to AMT calculations.

For 2024, the AMT exemption is $85,700 for single filers and $133,300 for joint filers, with phase-out thresholds at $609,350 and $1,218,700 respectively. These will likely decrease significantly in 2026 if TCJA provisions expire.

Under AMT rules, certain deductions like depreciation may be limited, potentially increasing overall tax liability. Other factors such as large state and local tax deductions can also trigger AMT.

To prepare:

• Work with tax advisors to model various scenarios.
• Consider spreading major property improvements over several years to manage AMT exposure.
• Stay informed about potential legislative changes affecting AMT thresholds and exemptions.

This change underscores the importance of proactive tax planning and understanding your potential AMT exposure in the coming years.

Bonus Depreciation

While not directly tied to the TCJA sunset, the ongoing phase-out of bonus depreciation is a critical consideration for real estate investors.

The current schedule is as follows:

• 2024: 60% bonus depreciation
• 2025: 40% bonus depreciation
• 2026: 20% bonus depreciation
• 2027: 0% bonus depreciation

Investors should carefully consider the timing of major spending to maximize available depreciation benefits.

The phaseout of bonus depreciation also impacts the value of cost segregation studies, a strategy many real estate investors use to accelerate depreciation. While these studies will remain useful, their immediate tax benefits decrease as bonus depreciation rates decline.

Given these changes, consider accelerating planned improvements or acquisitions to take advantage of higher bonus depreciation rates. Additionally, explore alternative strategies for maximizing depreciation deductions, such as more aggressive cost segregation studies or focusing on improvements that qualify for other tax incentives.

Estate Tax Exemption

A critical change for high-net-worth real estate investors is the scheduled reduction in the lifetime estate tax exemption. Currently set at $13.61 million per person ($27.22 million for married couples), this exemption is set to be roughly halved in 2026.

This change could have profound implications for wealth transfer strategies and estate planning. For example, imagine you’re a real estate investor with a portfolio valued at $20 million. Under current rules, your entire estate would be below the exemption threshold for a married couple. However, after 2025, a significant portion of your estate could be subject to estate tax at a rate of up to 40%.

To mitigate this impact, consider implementing wealth transfer strategies to take advantage of the current higher exemption amounts.

Opportunity Zones

Real estate investors involved in Opportunity Zone investments should be aware of the upcoming deadline for deferred gains. Dec. 31, 2026 marks a significant milestone for Opportunity Zone investments, as deferred capital gains will become taxable.

If you’ve invested in an Opportunity Zone, you’ll need to plan for this tax liability. For example, if you deferred a $1 million capital gain by investing in an Opportunity Zone in 2021, you’ll need to pay taxes on that original deferred gain in 2026, even if your investment hasn’t been liquidated. While the tax on the original deferred gain is due in 2026, any appreciation on the investment itself can still benefit from tax-free treatment if held for at least 10 years.

This impending tax liability underscores the importance of cash flow planning for Opportunity Zone investors. Ensure you have sufficient liquidity to pay the tax bill when it comes due, which may involve planning for distributions from the Opportunity Zone investment or setting aside funds from other sources.

Keep in mind that if you sell your Opportunity Zone investment before 2026, the deferred gain becomes taxable at that point. Additionally, while the 2026 deadline is significant, the Opportunity Zone program itself doesn’t expire. New investments can still be made after 2026, but they won’t benefit from deferral beyond 2026.

Update Your Real Estate Investment Tax Strategy

The upcoming tax law changes present both challenges and opportunities for real estate investors. With proactive planning, investors can position themselves to minimize their liability in the coming years. The key is to start planning now, well ahead of the 2025 sunset provisions.

Not sure where to start? At James Moore & Co., our team of real estate tax specialists is ready to help you navigate these complex tax changes. Contact us today to ensure you’re prepared for 2025 and beyond.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.