Tax Changes on the Horizon for Real Estate and Construction Companies

While the GOP is in control of the White House and holds majorities in the House and Senate, passing tax legislation in 2025 may be challenging due to narrow margins, differing views within the majority party, and the federal deficit. Despite these issues, some form of legislation with an impact on the real estate and construction industry is likely in response to the sunsetting provisions of the 2017 Tax Cuts and Jobs Act (TCJA). Many tax provisions are set to expire beginning with the 2026 tax year.

Qualified Business Income Deduction
Many real estate and construction companies currently benefit from the 20% deduction of their qualified business income. This deduction is one of the provisions set to expire, but this deduction is high on the list to either be extended or made permanent.

Bonus Depreciation
Bonus depreciation allows construction and real estate companies to deduct a certain percentage of qualifying assets in the year they are placed in service. From 2018-2022, the deduction was 100%, but it is set to decrease by 20% each year until fully phasing out in 2027. The GOP will aim to reinstate the 100% deduction, which would free up capital for more projects and improvements. Construction and real estate companies may consider cost segregations on projects to fully capitalize on the bonus depreciation deduction.

State and Local Tax Deduction
As a result of the TCJA, the state and local tax (SALT) itemized deduction has been capped at $10,000, but this is set to expire in 2026. While this cap was enacted as part of TCJA, many Republicans support the expiration or increase of the cap.  Many Democrats, especially in high-tax states such as New York and California, also support the expiration or increase of the cap.

Business Interest Expense
Beginning in 2022, deductions for depreciation are not added back to taxable income in calculating the adjustable taxable income (ATI) limitation for section 163(j) business interest. The GOP supports allowing the depreciation add-back which would allow construction and real estate companies to deduct more business interest expense on their returns.

Clean Energy Tax Credits
The Biden administration introduced clean energy tax credits as part of the Inflation Reduction Act to promote the adaption of renewable energy, particularly in construction. These credits could be reduced in order to help pay for some of the other tax cuts. As a result, construction and real estate companies should reevaluate the financial benefits of energy sustainable practices without the added tax credits.

Housing Crisis

The housing crisis continually showed up as a topic of conversation during the 2024 presidential election season. While Trump has not specified his plans, his ideas include making some federal land available for residential construction, creating tax incentives for homebuyers, and cutting “unnecessary” regulation on home construction. The focus on residential construction could result in some favorable changes for construction and real estate companies, though the exact outcomes are unknown.

Tariffs
The Trump administration plans to raise tariffs, including a 60% tariff on goods imported from China and a 10% to 20% tariff on imported goods from other countries. These increases may raise supply costs. As a result, construction and real estate companies should evaluate their current supply chains to identify potential cost saving opportunities. Companies may consider domestic sourcing or venturing upstream in the supply chain should such decisions be advantageous.

Wilkins Miller’s Role
Whether or not legislation passes, changes are on the horizon. We at Wilkins Miller want to help you achieve even in the middle of uncertainty. Our team will continue to share relevant information as the time comes. Please reach out to your Wilkins Miller advisor with any questions related to these potential changes and how it may impact you.