As political dynamics shift with a Republican-controlled Congress and Donald Trump's return to the White House, the real estate and construction sectors are bracing for sweeping tax reforms. With over 30 provisions from the Tax Cuts and Jobs Act (TCJA) set to expire at year’s end, companies must proactively evaluate how these changes could influence their financial strategies, capital deployment, and overall profitability.

Stay Ahead of the Curve: Equip Your Firm for Upcoming Tax Policy Shifts

Raising Capital Amid Evolving Tax Policies

The interplay between interest rates and tax incentives is shaping the way real estate firms secure funding in an increasingly volatile market. As borrowing costs soar due to elevated interest rates, policymakers may introduce measures to stabilize returns and reduce project expenses. A potential reinstatement of TCJA provisions favorable to real estate could act as a magnet for investment by lowering development costs.For instance, adjustments to the business interest expense limitation—a critical factor influencing new project investments—could significantly impact cash flow projections. Although bipartisan support exists for revising this limitation, its implementation remains contingent on broader legislative priorities. Commercial lessors, in particular, stand to benefit from a more lenient restriction, enabling them to adopt accelerated depreciation methods that enhance long-term profitability.Moreover, easing the cap on interest deductions could alleviate some of the financial strain caused by rising rates. Many taxpayers, especially those involved in commercial real estate, face heightened pressure due to cyclical debt exposure. Lowering corporate and capital gains tax rates also aligns with efforts to stimulate economic activity, freeing up additional capital for reinvestment. Furthermore, initiatives like the Revitalizing Downtowns and Main Streets Act could provide valuable tax credits for transforming aging office spaces into residential properties, fostering urban renewal.

Deploying Capital Under New Economic Realities

Inflationary pressures and diminished deductions have created significant hurdles for both real estate entities and construction businesses seeking substantial investments. The escalating cost of capital coupled with reduced deductions has hindered large-scale acquisitions of equipment or supplies necessary for growth. For example, lessors find it increasingly challenging to undertake major renovations needed to attract high-value tenants.Trade policies, including tariffs imposed by the U.S. and its global partners, further complicate matters by increasing sourcing costs and affecting export revenues. Reinstating full bonus depreciation, which began phasing out in 2023, could offer much-needed relief to construction firms burdened by higher asset acquisition costs. President Trump has expressed commitment to restoring immediate capital expensing retroactively from January 20, 2025, signaling a strategic focus on revitalizing the industry.Additionally, addressing the unfavorable treatment of research and development (R&D) expenses introduced in 2022 could prove beneficial. Despite not traditionally associating themselves with R&D, many real estate companies engaged in construction, manufacturing, and engineering services incur such expenses. Ensuring immediate deductibility would enhance competitiveness while encouraging innovation across related sectors.

Maximizing Returns Through Tax Optimization

Aligning ordinary income tax rates closer to capital gains rates creates opportunities for optimizing returns through strategic project structuring. Lower capital gains rates incentivize developers to pursue deals structured for achieving preferential tax treatment upon property sales. This approach not only enhances profitability but also attracts investors seeking optimal returns.A reduction in the corporate tax rate could alter the composition of entities participating in real estate activities, potentially favoring pass-through structures benefiting from extended qualified business income deductions. Such modifications would empower contractors and real estate enterprises operating under these models to maximize their earnings potential.Furthermore, extending preferential capital gains treatment for Qualified Opportunity Zone (QOZ) investments could catalyze increased participation in real estate ventures. Simultaneously, leveraging tools like like-kind exchanges allows firms to defer gains on real estate transactions by reinvesting in qualifying properties, preserving liquidity and enhancing portfolio value.Real estate and construction companies collaborating closely with tax advisors can effectively monitor legislative developments and simulate the impact of anticipated changes on their operations. Preparedness ensures timely decision-making once final policies emerge, positioning firms to capitalize fully on emerging opportunities within the evolving tax landscape.