What real estate investors need to know for 2025 and beyond
As a certified public accountant, I often find myself in the position of the harbinger of doom when it comes to discussing tax law changes. While federal tax law changes sound about as thrilling as watching paint dry, they are, in fact, crucial to understand – especially with some significant tax provisions set to expire after 2025. So, grab your calculators and let’s dive into what provisions are currently set to expire and what would need to happen to extend some of these.
Expiring Provisions: The Highlights
The Tax Cuts and Jobs Act (TCJA) brought about sweeping changes, including lower individual tax rates, increased standard deductions, and limited state and local tax (SALT) deductions. However, many of these provisions are set to expire on December 31, 2025. Unless Congress acts, we could see a return to pre-TCJA tax rates and deduction limits. This would mean higher taxes for many, so it’s a good idea to start planning for this possibility now. Here are some changes that should be on your radar:
Marginal Tax Rates
As we bid adieu to the more favorable tax rates of the TCJA, we’ll be saying hello to higher rates. The highest marginal tax rate for individuals has been 37% since 2018. However, absent any acts from Congress, the highest rate will default back to 39.6% as it was pre-TCJA.
Bonus Depreciation
One of the more generous provisions of the TCJA was the 100% bonus depreciation for qualified property. This allowed businesses to immediately deduct the cost of certain property rather than depreciating it over time. However, this provision is set to phase out, with the percentage dropping to 40% in 2025, and 20% in 2026 before disappearing entirely in 2027. However, my prediction is that we will see bonus depreciation increase above these levels. In 2025, bonus depreciation will be at its lowest percentage since 2003, when it was 30%. The downside? Gaining bonus depreciation could mean losing another favorable tax benefit in budget reconciliation.
Section 199A Qualified Business Income Deduction
The QBI deduction allows eligible taxpayers to deduct up to 20% of their qualified business income. This provision significantly benefits many real estate investors, but it’s currently set to expire at the end of 2025. If the QBI deduction does sunset, it could lead to higher taxable income for many investors. If I were a betting man (only in Vegas), I would wager this provision will be extended. If Congress does let it expire, there would be an incentive for more businesses to organize as C corporations to take advantage of the lower 21% tax rate.
Those that know me may or may not have called me “Eric Opportunity Zone Freeman”. This provision is near and dear to my heart, thanks to all the clients that keep me busy with their projects. It’s also an incentive that real estate investors should keep on their radar. Created under the TCJA, these zones offer tax incentives for investments in economically distressed areas, encouraging development and revitalization. By investing in these zones, investors can defer gains in the short-term and potentially exclude capital gains in the long-term. However, the current tax benefits associated with Opportunity Zones are also set to expire in 2026. An extension would be a much-appreciated win for many that have sat on projects as construction and other costs have risen in Tucson. Although, discussions of this topic have not been without drama in Congress.
To help you navigate the upcoming changes, here is a chart summarizing which provisions from the TCJA are set to expire and which are permanent:
| Provision | Status |
|---|---|
| Individual Tax Rates | Expires in 2025 |
| Standard Deductions | Expires in 2025 |
| State and Local Tax Deduction Limit | Expires in 2025 |
| Bonus Depreciation | Phases out by 2027 |
| Section 199A QBI Deduction | Expires in 2025 |
| Opportunity Zones | Expires in 2026 |
| Corporate Tax Rates | Permanent |
The Crystal Ball: Will these provisions be extended?
Predicting the future of tax laws is a bit like forecasting the weather – sometimes you get it right, and sometimes you end up drenched without an umbrella. However, we can look at the current political landscape for some clues.
The House and Senate Dynamics
Although I am not an expert in politics, having a fundamental understanding of the political climate is essential for predicting future tax legislation. Despite Republican House and Senate control, there will need to be bipartisan support for any tax provisions to be extended. This means that lawmakers will need to reach across the aisle and find common ground. Any tax law changes will more than likely need to be part of the budget reconciliation process, which has its own guardrails. However, certain provisions, like the QBI deduction, have widespread support among both parties, which increases the likelihood of an extension.
Economic Factors
The state of the economy will also play a significant role in whether these tax provisions are extended. If the economy is thriving, there may be less pressure to extend these provisions. However, if there are economic challenges, lawmakers may be more inclined to provide tax relief to businesses and individuals to stimulate growth.
The Bottom Line
Navigating the ever-changing landscape of tax laws can be daunting, but with a bit of foresight and planning, you can stay ahead of the game. As we approach the expiration dates of these key provisions, keep your eye on the political weather and have your umbrella ready. After all, in the world of taxes, it’s always better to be prepared for a downpour than to be caught in the rain without a plan.
So, here’s to staying dry and making the most of the tax laws while we can. Cheers to a prosperous 2025 and beyond!
As always, please reach out to anyone at BeachFleischman, PLLC for your tax, assurance, and consulting needs.
This article was originally published in the January 2025 issue of TREND report.