New Tax Laws for Real Estate Investors: Depreciation, QBI, and SALT

The One Big Beautiful Bill, signed into law on July 4, 2025 (P.L. 119-21), rewrote the federal tax rules that matter most to real estate investors. The new tax laws for real estate investors restore permanent 100 percent bonus depreciation, make the qualified business income deduction permanent at a higher 23 percent rate, ease the cap on business interest deductions, lift the state and local tax deduction to $40,000, and shorten the runway for several energy-efficiency incentives. Below is what changed, and what each change means when you file.

Bonus Depreciation Back at 100 Percent

The phase-out that was set to drop bonus depreciation to 20 percent in 2026 is gone. The law provides a permanent 100 percent first-year deduction for qualified property acquired after January 19, 2025.¹ For real estate, the main asset class in play is qualified improvement property: interior work on a nonresidential building after it was first placed in service, including plumbing, lighting, HVAC, and security upgrades. Exterior expansions, elevators, and structural changes do not qualify.² Personal property broken out through a cost segregation study, such as appliances, carpeting, and certain land improvements, is also eligible.

There is one twist worth knowing. For the first tax year ending after January 19, 2025, you can elect to take 40 percent bonus depreciation instead of the full 100 percent.¹ That can help if you expect higher income in later years and would rather save the deductions. The election, once made, covers all eligible property in that class placed in service during the year.

QBI Deduction Made Permanent at 23 Percent

Section 199A was scheduled to expire after December 31, 2025. The new law makes it permanent and increases the deduction from 20 percent to 23 percent of qualified business income.³ On $200,000 of net rental income through a pass-through, that extra three points is $6,000 more in deductions. The benefit runs to individuals, trusts, and estates with income from sole proprietorships, partnerships, and S corporations.⁴

Higher-income filers phase into limitations tied to W-2 wages paid and the unadjusted basis of qualified property. For 2026, the phase-in begins at $403,500 for married filing jointly and $201,750 for other filers. Rental activity also has to qualify as a trade or business, which is where investors most often stumble.

Revenue Procedure 2019-38 lays out a safe harbor. You need 250 hours of rental services per year for each enterprise (or in three of the last five years for enterprises that have existed at least four years), separate books and records for each enterprise, and contemporaneous time logs showing hours, services, dates, and who performed the work.⁵ Qualifying services include advertising, lease negotiation, tenant screening, rent collection, maintenance, and property management.

Triple net leases are the common problem. Because the tenant handles most of the ongoing property responsibilities, the landlord’s hours rarely reach 250. If your portfolio is mostly NNN, the safe harbor probably will not apply, and you will need another basis to establish trade or business status.

Business Interest Deduction Loosened

Section 163(j) caps deductible business interest at 30 percent of adjusted taxable income. From 2022 through 2024, that income figure excluded depreciation and amortization, which squeezed capital-intensive real estate operations. The new law permanently restores the more generous formula that adds depreciation and amortization back into the income base, effective for tax years beginning after December 31, 2024.⁶ For leveraged investors, that meaningfully expands how much interest you can deduct each year.

Smaller operations may be off the hook entirely. Businesses with average annual gross receipts of $31 million or less over the prior three years, a threshold indexed each year for inflation, are exempt from the cap.⁶ Most individual landlords and small-portfolio investors fall below it.

Above the threshold, real property trades or businesses can make an irrevocable election out of the 163(j) limitation. The cost is switching to the Alternative Depreciation System for residential rental and nonresidential real property, which stretches depreciation to 30 years for residential and 40 years for nonresidential. If you are heavily leveraged, uncapped interest deductions usually beat faster depreciation.

SALT Cap Raised to $40,000

The state and local tax deduction cap, set at $10,000 by the Tax Cuts and Jobs Act, jumps to $40,000 starting in 2025. It rises by one percent in 2026 to roughly $40,400 and continues with one-percent annual bumps through 2029. Married filing separately gets half the cap.

For property owners, this matters because property taxes are usually the biggest piece of the SALT bill. The cap applies to your personal return, on taxes paid for properties held in your own name. Property taxes on rentals held through an LLC, partnership, or S corporation are typically deducted as business expenses and are not subject to the SALT cap at all.

The raise phases down at the top. Once income clears roughly $500,000 (rising by one percent annually through 2029), the $40,000 cap shrinks by 30 cents per dollar of income above the threshold, bottoming out again at $10,000. High earners see less of the benefit than middle-income investors.

Capital Gains and Depreciation Recapture at Sale

When you sell investment real estate for a gain, the tax splits in two. Gain attributable to prior depreciation is recaptured at a maximum federal rate of 25 percent.⁷ Gain above your original basis is taxed at long-term capital gains rates of 0, 15, or 20 percent depending on income.

The 2026 capital gains brackets:

0 percent on taxable income up to $49,450 (single) or $98,900 (married filing jointly).⁸
15 percent from those thresholds up to $545,500 (single) or $613,700 (married filing jointly).
20 percent above those upper thresholds.

One trap catches investors who never took depreciation. The IRS reduces your basis by depreciation “allowed or allowable,” meaning you owe recapture on what you could have deducted whether you actually claimed it or not.⁷ Always take the deduction. You pay for it at sale either way.

With 100 percent bonus depreciation back, the recapture math on cost-segregated components deserves a second look. Personal property such as appliances, carpeting, and certain land improvements falls under Section 1245, and recaptured gain there is taxed as ordinary income up to 37 percent, not the 25 percent that applies to the building itself. Bigger upfront deductions mean a bigger recapture bill on a straight sale.

Higher-income investors also owe the 3.8 percent net investment income tax on the lesser of net investment income or the amount by which modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly).⁹ Those thresholds are not indexed to inflation.

1031 Exchanges Are More Valuable Than Ever

A like-kind exchange lets you defer both the capital gains tax and the depreciation recapture tax by rolling the proceeds from one investment property into another of equal or greater value. The deadlines do not bend. You have 45 days from closing on the sale to identify replacement property in writing, and 180 days from the sale date (or the due date of your return for the sale year, including extensions, whichever comes first) to close.¹⁰ Miss either by a day and the entire exchange fails.

You also cannot touch the sale proceeds. A qualified intermediary must hold the funds between sale and purchase. Your agent, attorney, or accountant, or anyone who served in those roles for you in the prior two years, cannot act as intermediary. The intermediary prepares the exchange agreement, assigns the contracts, and coordinates with the settlement agents on both ends.

With bonus depreciation restored to 100 percent and Section 1245 property facing ordinary-income recapture, the case for exchanging out of a property rather than selling has grown stronger. Investors who ran cost segregation studies and took large upfront deductions face the steepest bills on a straight sale.

Real Estate Professional Status

Rentals are passive by default, so losses generally can offset only other passive income. Real estate professional status removes that limit and lets rental losses shelter salary and business income. When bonus depreciation is throwing off large paper losses, that classification can save tens of thousands of dollars a year.

Two tests apply, both in the same year. More than half of your total personal services across all trades or businesses must be in real property activities, and you must log more than 750 hours in real property trades or businesses in which you materially participate.¹¹ Development, construction, acquisition, management, leasing, and brokerage all count.

On a joint return, only one spouse needs to pass both tests, but that spouse’s hours alone are what count. Spouses cannot pool hours. The qualifying spouse also has to materially participate in each rental treated as nonpassive, or elect to aggregate all rental interests into one activity.¹¹ With multiple properties, aggregating usually wins, because material participation is judged property by property otherwise.

This is the audit hotspot. Keep detailed logs, written close to the actual dates: what you did, when, and for how long. Reconstructed year-end summaries carry much less weight than contemporaneous records.

Energy Incentives Winding Down

The One Big Beautiful Bill accelerated the termination of several energy-related tax incentives investors had been counting on.¹² Two matter most for real estate.

Section 45L New Energy-Efficient Home Credit

Section 45L was scheduled to run through 2032 under the Inflation Reduction Act. It now terminates for any home acquired after June 30, 2026.¹² For homes acquired before that date, the existing credit structure remains: single-family homes meeting Energy Star standards qualify for $2,500, and $5,000 with Zero Energy Ready Home certification; multi-family units get $500 and $1,000, rising to $2,500 and $5,000 when prevailing wage requirements are met.¹³ Projects closing before the deadline should have third-party energy certification lined up.¹⁴

Section 179D Energy-Efficient Commercial Building Deduction

Section 179D was also modified.¹² For properties that still qualify, the deduction starts at $0.50 per square foot for a 25 percent reduction in energy costs and scales up by $0.02 per additional percentage point of savings to a maximum of $1.00. Buildings meeting prevailing wage and apprenticeship requirements receive enhanced rates roughly five times higher.¹⁵ Base amounts have been inflation-adjusted annually since 2023.¹⁶ Given the accelerated termination timeline, verify the current availability window with the IRS before planning around it.

1
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
2
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
3
Internal Revenue Service. Qualified Business Income Deduction
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Office of the Law Revision Counsel. 26 US Code 199A – Qualified Business Income
5
Internal Revenue Service. Revenue Procedure 2019-38
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Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
7
Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets
8
Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
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Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
10
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
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Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
12
Internal Revenue Service. FAQs for Modification of Sections 25C, 25D, 25E, 30C, 30D, 45L, 45W, and 179D Under Public Law 119-21
13
Office of the Law Revision Counsel. 26 US Code 45L – New Energy Efficient Home Credit
14
Internal Revenue Service. Credit for Builders of New Energy-Efficient Homes
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Office of the Law Revision Counsel. 26 US Code 179D – Energy Efficient Commercial Buildings Deduction
16
Internal Revenue Service. Energy Efficient Commercial Buildings Deduction