• 100% bonus depreciation is back, and real estate owners and developers should act quickly to maximize deductions based on timing and qualified property use.

• Permanent Section 199A and 163(j) changes offer increased planning certainty and expanded benefits for REITs and other real estate businesses.

• New rules for residential condo developers and REIT subsidiaries provide you with targeted relief and flexibility, but only for contracts and tax years moving forward.

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The reconciliation tax bill signed into law by President Trump on July 4 sets out sweeping tax changes, with many provisions of interest to the real estate industry. This Alert highlights the most important changes for the industry to focus on in tax planning.

With the legislation now final and generally in effect, taxpayers in the real estate industry should evaluate the implications of the new legislation for their business and work with tax advisors to assess the impact of the provisions, especially those noted below, and identify planning opportunities and challenges.

Bonus Depreciation

The legislation permanently restores 100% bonus depreciation for property acquired and placed in service after January 19, 2025, for which there was no written binding agreement in effect before January 20, 2025. It also creates a new elective 100% depreciation allowance under Section 168(n) for any portion of nonresidential real property that is considered “qualified production property” (the QPP election). The QPP election is available if construction on the property began after January 19, 2025, and before January 1, 2029, and the property is placed in service by the end of 2030.

A qualified production activity includes the manufacturing of tangible personal property, agricultural production, chemical production, or refining. Qualified production property does not include property located outside the U.S. or U.S. possessions or any portion of building property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software engineering activities, or other functions unrelated to qualified production activities. Property with respect to which the taxpayer is a lessor is not considered to be used by the taxpayer as part of a qualified production activity even if the property is used by a lessee in a qualified production activity.

There is an exception from the original use requirement if acquired property was not used in a qualified production activity between January 1, 2021, and May 12, 2025. Special recapture rules apply if the property is disposed of within 10 years after it is placed in service.

Insights

The restoration of 100% bonus depreciation is a welcome provision of the new legislation.  Qualified improvement property will continue to qualify for bonus depreciation, as will land improvements and other MACRS recovery property with a recovery period of 20 years or less. The placed-in-service date will be important, as property placed in service in 2024 will qualify only for 60% bonus depreciation and property placed in service between January 1, 2025, and January 19, 2025, will qualify only for 40% bonus depreciation.

Additionally, allowing producers, refiners, and manufacturers to fully expense buildings rather than depreciate them over 39 or 15 years is a substantial benefit. The definition of “production” will be important, and generally requires “a substantial transformation of the property comprising the product.” Taxpayers with buildings that house both qualified production activities and other administrative, office, or research functions will also likely need to perform an analysis to allocate costs between functions.

Section 199A

The legislation makes permanent the 20% deduction for qualified business income under Section 199A and favorably adjusts the phaseout of the deduction for taxpayers who do not meet the wage expense and capital investment requirements or who participate in a “specified service trade or business.”

Insights

The permanency of this provision provides welcome certainty for real estate investment trusts (REITs) and other real estate businesses. The safe harbor for rental activity to qualify as a Section 199A trade or business under Rev. Proc. 2019-38 remains in effect.

Section 163(j) Interest Deduction Limit

The legislation permanently restores the exclusion of amortization, depreciation, and depletion deductions from the calculation of adjusted taxable income for purposes of Section 163(j), which generally limits interest deductions to 30% of adjusted taxable income. The change is effective for tax years beginning after 2024.

Insights

This provision should allow many taxpayers in the real estate industry to reduce or eliminate their Section 163(j) interest expense limitation without making a real property trade or business election, which will preserve their ability to take bonus depreciation on qualified leasehold improvement property.

Taxable REIT Subsidiary Asset Test

The legislation raises from 20% to 25% the portion of the gross asset value of a REIT that may be attributable to equity and debt securities of taxable REIT subsidiaries, effective for tax years beginning after 2025.

High-Rise Residential Condominium Development, Construction and Sale

The legislation allows the completed contract method of accounting for many residential condominium, construction, and sale projects, effective for contracts entered into after July 4, 2025. For residential developers meeting the average annual gross receipts test under Section 448 ($31 million in 2025), the maximum estimated contract length is increased from two years to three years to qualify for the exception from the UNICAP rules under Section 263A.

Insights

This provision provides much needed tax relief to condo developers who often had to report income under the percentage of completion method, which often required the reporting of income before receiving payment. Allowing the use of the completed contract method of accounting allows better matching of reporting taxable income with the receipt of cash by the developer.

Unfortunately, the relief is provided prospectively, only for contracts entered into after the July 4, 2025, enactment date.  Therefore, taxpayers with contracts entered into prior to the enactment date will continue to be subject to the old rules. Moreover, reporting income for projects begun in prior years may be bound to the prior method of accounting.

SALT Cap

The legislation makes the state and local tax (SALT) cap permanent while raising the threshold for 2025-2029 before reverting to $10,000 in 2030. The cap is increased to $40,000 for 2025 but phases down to $10,000 once income exceeds $500,000. Both thresholds will increase by 1% for each year through 2029. The final version of the legislation does not include the provision in the earlier House bill that would have shut down taxpayers’ ability to use pass-through entity tax regimes to circumvent the SALT cap.

Other Important Provisions and Notable Omissions

There are many other significant changes in the legislation. Of particular interest to the real estate industry, the legislation:

• Makes permanent the qualified opportunity zone program, including the deferral of capital gains through investments in a qualified opportunity fund, and updates the rules for investments made after 2026; current QOZ designations will expire early at the end of 2026.
• Phases out many Inflation Reduction Act energy credits early and imposes new sourcing restrictions.
• Repeals the deduction for energy efficient improvements to commercial buildings under Section 179D for property beginning construction after June 30, 2026.
• Makes permanent the increases to the low-income housing tax credit.
• Makes permanent the new markets tax credit.

In addition, there were several provisions under discussion that would have affected the real estate industry but that were not ultimately included in the final legislation. The final legislation:

• Does not include the “revenge tax” or “retaliatory tax” under proposed new Section 899, which had been included in the initial House-passed version of the bill and would have increased tax and withholding rates on taxpayers resident in countries imposing “unfair foreign taxes.”
• Does not include a provision included in the earlier House bill that would have required disallowed losses to remain subject to the Section 461(l) active loss limitation in future carryover years.
• Does not eliminate the carried interest “loophole,” despite President Trump having expressed support for such a provision.
• Does not include a limit on state and local tax deductions for businesses.

For a broad discussion of the provisions in the legislation, see BDO’s Tax Alert, “Republicans Complete Sweeping Reconciliation Bill,” and Comparison Chart of Key Provisions in the 2025 Tax Legislation.

How MGO Can Help

Navigating the sweeping tax changes in this new legislation requires more than a surface-level understanding. It calls for strategic foresight, detailed analysis, and expert guidance. At MGO, our real estate tax professionals are here to help you assess the impact of these new rules, strengthen your tax positions, and uncover planning opportunities tailored to your portfolio or operations. Whether you’re a REIT, developer, investor, or owner-operator, we’re ready to provide clarity, confidence, and customized strategies to help you thrive under the new tax landscape. Contact us to learn more.

Written by Julie Robins and Robert Schachat. Copyright © 2025 BDO USA, P.C. All rights reserved. www.bdo.com

The post New Tax Law Includes Numerous Provisions Affecting Real Estate Industry appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Delaware Statutory Trusts (DSTs) are eligible for 1031 exchanges, offering an alternative when searching for like-kind property. 1031 exchange investors can roll proceeds into multiple investments at the exact amounts needed to satisfy the like-kind replacement requirement.

• The fractional ownership of DSTs gives solo investors access to commercial-grade real estate assets similar to those owned by institutional investors, insurance companies, pension funds, and real estate investment trusts (REITs).

• Investors receive passive income without the responsibilities of managing tenants, handling maintenance, or searching for financing.

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A Delaware Statutory Trust (DST) is a relatively new but compelling alternative for real estate owners who are ready to step back from hands-on management but still want to stay invested in income-producing property.

Whether you’re eyeing a 1031 exchange or exploring options to simplify your portfolio, DSTs offer a structure that blends the tax benefits of real estate ownership with the ease of a professionally managed investment.

DSTs have become more popular recently because they resemble the structure of a real estate partnership or LLC. However, instead of managing properties directly, investors receive regular income distributions while a third-party sponsor — usually a professional real estate company — oversees the operations, financing, and maintenance of the property or portfolio.

In this article, we break down how DSTs compare to traditional real estate investments and why they are gaining traction among investors who want flexibility and long-term strategy.

What Is a DST?

A DST is a legal entity created under Delaware trust law. These special business trusts were created in 1988 with the passing of the Delaware Business Trust Act, which was renamed the Delaware Statutory Trust Act (DST) in 2002.

DST investors don’t actually own physical real estate; they own shares of the trust that was formed to be the legal owner of the underlying properties held within the trust. Each investor is treated as an owner of the trust — commonly referred to as a “grantor trust” — and the income and expenses are reported directly on their individual income tax returns.

These special business trusts create a legally secure and clearly defined entity that establishes legal separation between the trust and its beneficiaries. However, since the Internal Revenue Service (IRS) treats each investor’s beneficial interests as direct property ownership, DSTs are eligible for 1031 exchanges both upfront and upon exit.

DSTs are typically formed by real estate companies called “sponsors”, who identify and acquire the assets that are placed under trust using their own capital. DST sponsors engage a registered broker-dealer to open an offering period, and individual investors purchase fractional shares of the DST. Although they provide equity capital, DST beneficiaries are passive investors.

DST sponsors control the day-to-day operations of the assets held under trust. Sponsors are also responsible for distributing monthly cash flow distributions, quarterly reporting, tax reporting, and performance reviews of the assets under their management.

Sponsors vary greatly in management experience, and a thorough vetting process should be undertaken before investing in a DST.

Types of Properties Held in a Delaware Statutory Trust

A DST can hold nearly all types of commercial real estate properties across the U.S., including:

• Student housing

• Senior housing

• Medical offices

• Self-storage facilities

• Distribution centers

• Corporate headquarters

• Multifamily housing

These assets are often unattainable for individual investors due to the hefty purchase price (usually anywhere from $30 million to $100 million), but they’re accessible through the DST’s fractional ownership model.

How DSTs Work in a 1031 Exchange

One powerful feature of a DST is its compatibility with Internal Revenue Code Section 1031, which allows investors to defer capital gains taxes when exchanging one real estate asset for another. Traditionally, this has locked investors into actively managing replacement properties — but DSTs offer an alternative path forward.

DST interests are sold as securities, so investors must work with a registered broker-dealer or registered investment advisor to invest in a DST.

Two critical requirements in a delayed exchange are (1) that the replacement property must be properly identified within the identification period, and (2) acquired before the end of the exchange period. Failure to identify a replacement property within the 45-day period will disqualify the 1031 exchange.

DSTs are also a potential backup replacement property when an investor can’t identify a replacement property for a 1031 exchange within the allowable timeline (45 days), because most DST sponsors have already identified the underlying properties.

Case Study: From Active Owner to Passive Investor

One of our clients, a long-time real estate owner, personally managed an apartment building he owned for decades. He was nearing retirement age, and the burdens of maintenance and tenant management were becoming increasingly difficult. However, he wanted to preserve his real estate portfolio as an income stream during his lifetime and as an asset to leave for his children.

Rather than selling the property and paying capital gains taxes on the profits, the client took advantage of a 1031 exchange to trade the apartment building for a DST portfolio of properties. As a result, he continued to receive monthly income without the need to actively manage the real estate and had a potentially appreciating asset to pass down to his heirs. The DST structure also made it easier to divide assets among beneficiaries compared to physical property.

Considerations and Risks

As with all real estate investments, DSTs involve risk. Market fluctuations can affect property values, and fractional ownership means you don’t have direct control over operations or decision-making. Plus, investing in properties located across multiple states may introduce new state-level income tax filing requirements.

While it’s crucial to be aware of these factors, many investors find the benefits outweigh the limitations — particularly when they want to simplify portfolio management, diversify their investments, and continue to invest in real estate.

Whether you want to reduce active involvement in your real estate holdings or are looking for replacement property for a 1031 exchange, a DST could be an option.

How MGO Can Help

If you currently own investment property and are considering selling, consult with a qualified professional before initiating any transaction. MGO’s team of tax professionals can help you estimate your potential gain and potential tax liabilities, evaluate replacement options, and align your strategy with your long-term goals.

A DST isn’t the right fit for every investor, but in the right circumstances, it may provide the clarity and peace of mind you’re looking for.

Ready to explore your options? Contact MGO to discuss how a DST might support your real estate and legacy goals.

This article is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your situation from qualified advisors in your jurisdiction.

The post Delaware Statutory Trusts: An Alternative for Real Estate Investment appeared first on MGO CPA | Tax, Audit, and Consulting Services.

• Companies can reduce BEAT liability by reclassifying payments, capitalizing costs into COGS, or restructuring contracts to limit related-party payments.

• Tax teams should use year-end insights to refine transfer pricing, improving compliance, reducing risks, and adapting to changing rules.

• The IRS may adjust intercompany loan rates if implicit support impacts third-party terms, requiring group affiliation to be considered.

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The base erosion anti-abuse tax, known as “BEAT,” introduced as part of Tax Cuts and Jobs Act in 2017, was intended to prevent taxpayers from reducing their U.S. tax liability by shifting profits through payments to related parties in low-tax jurisdictions outside the U.S. 

Beat Tax Threshold Requirements 

To be subject to the BEAT, U.S. taxpayers must meet the following two requirements: 

• A three-year average of gross receipts greater than $500 million (excludes regulated investment companies, REITs, or S-Corps). 

• A base erosion percentage for the taxable year of 3.0% or more (2.0% for banks and special entities), where “base erosion” percentage is defined to be the sum of all base erosion payments (defined below) divided by the total amount of deductions for the year. 

For U.S. taxpayers who meet requirements, the following BEAT tax rate applies to its modified taxable income, adjusted for BEAT payments: 

• Before calendar year 2026: 10.0% 

• After calendar year 2025: 12.5% 

The BEAT is an additional tax imposed on applicable taxpayers with base erosion payments including interest, royalties, and service payments to foreign related parties. A taxpayer would need to pay an additional amount by which the BEAT exceeds regular income tax if the income tax liability is lower than the BEAT liability. 

Transfer Pricing and BEAT Mitigation

While BEAT, under Internal Revenue Code Section 59A, has a broad definition of base erosion payments, including services, interest, certain property/assets, and royalties, it also provides types of foreign related-party payments that are exempt from BEAT considerations.  

One way to mitigate BEAT exposure is to rely on the services cost method (SCM) for outbound payments for certain intercompany services provided by non-U.S. related parties. The SCM, defined in Reg. §1.482-9(b), permits certain routine back-office and other low-value services to be charged at cost, rather than at the usual arm’s length charge. If service payments meet the SCM requirements, the amounts paid or accrued can be excluded from base erosion payments.

To utilize the SCM exemption under the BEAT, taxpayers should explore opportunities to classify services as SCM eligible, even if SCM was not previously selected as the transfer pricing method. For example, it is likely beneficial to separate back-office and administrative-type services, which could qualify for the SCM, from marketing services, which would not qualify for the SCM. Given that SCM eligibility does not require the business judgment test, treating certain services as low-margin services, when appropriate, can potentially reduce a BEAT liability.  

Another way to mitigate BEAT exposure is to utilize Section 263A and treat certain base erosion payments as part of cost of goods sold (COGS) — i.e., inventoriable costs. For U.S. taxpayers with inventories, amounts paid or accrued to a foreign affiliate through COGS are not treated as a base erosion payment. Section 263A outlines the uniform capitalization rules in which direct and allocable indirect costs of property produced or purchased for resale must be capitalized into inventory. 

For example, sales-based royalties and management fees are costs that can be capitalized under Section 263A:  

• Sales-based royalties can be considered capitalized costs and included in COGS as long as the underlying intangible property is connected to purchasing, production, storage, or handling of inventory. As such, sales-based royalties paid to a foreign affiliate can be excluded from base erosion payments if the costs are properly capitalized and included in COGS under Section 263A. Sales-based royalties associated with trademarks and trade names are expensed and likely not eligible for COGS inclusion.  

• Management fees may also be capitalized under Section 263A when the services are directly or indirectly related to purchasing, production, storage, or handling of inventory. For example, management fees that are related to the provision of sourcing or procurement services are likely capitalizable under Section 263A.  

Furthermore, there are structural/contractual changes that taxpayers can consider to reduce BEAT liability. Those changes include, for example, restructuring of financing, creation of a regional headquarters office, and modification of customer/supplier contracts, which would eliminate or decrease the payments from a U.S. entity to a foreign affiliate. 

Tax Planning Considerations 

While BEAT can have a significant impact on tax liability, BEAT planning using transfer pricing has not been a priority for many taxpayers. The strategies discussed above, and other BEAT planning using transfer pricing can be an effective approach for mitigating BEAT liability. 

Adopting a Proactive Approach to Transfer Pricing  

Adopting a proactive approach to tax process improvements can be an aspirational goal for many tax departments. Resource constraints, business pressures, new technical developments, and other factors can cause even the most meticulously planned schedules to go awry, and before anyone realizes it, year-end is upon them once again.  

Rather than feeling discouraged, companies can leverage their experience to understand what is achievable and then prioritize improvement projects that are appropriately sized for their business. 

Common Year-End Transfer Pricing Challenges 

1. Large Transfer Pricing Adjustments: Many companies use transfer pricing adjustments to determine they meet their desired transfer pricing policy. However, significant year-end adjustments can have both tax and indirect tax implications, leading to further issues and risks. 

2. Lack of Transparency in Calculations: Transfer pricing calculations are often built in Excel and amended over the course of the years, perhaps to address one-time issues or changing situations. This can result in workbooks that lack a sufficient audit trail and contain hard-coded data, both of which undermine a reviewer’s ability to validate the calculations. Additionally, without documentation, the process becomes dependent on the few people working directly on the process, which can create significant knowledge gaps if one or more of the key people leave the company. 

3. Data Constraints: While the mechanics of most transfer pricing calculations are not complex, difficulties arise because of the variety of data needed (revenues, segmented legal entity P&Ls, headcount, R&D spend) and the challenges in accessing that data. This can lead to shortcuts and unvalidated assumptions. 

Tax Planning Considerations 

• Develop a multiperiod monitoring process: Implement a process that tracks profitability throughout the year to help reduce significant year-end transfer pricing adjustments. This monitoring can also provide insights into whether underlying intercompany pricing policy changes are needed, allowing for a proactive approach to limit the number and magnitude of year-end adjustments. 
• Identify and review material transactions: Conduct a detailed review of calculation workbooks to pinpoint deficiencies, such as lack of version control, hard-coded amounts with no audit trail, limited or undocumented key assumptions, and an incoherent calculation process. Companies can address one or more of these issues based on timing and resources. Small changes can have a significant impact. 
• Define a data-focused project: Consider the data needed for transfer pricing calculations, investigate the form and availability of data, identify new data sources, and help data providers understand their importance in the overall process. This can be done on a pilot basis with a material transaction or group of transactions to keep the project manageable. Companies often discover new data sources and form valuable connections with data providers through these projects. 

Learning from the year-end process provides clarity on areas that need improvement. These observations can be captured and converted into small improvement projects as soon as possible after year-end. While companies can’t tackle everything at once, prioritizing key projects, developing a timeline with identified resources, and obtaining stakeholder buy-in quickly can significantly improve the next year-end experience. 

Implicit Support in Intercompany Loans  

The IRS recently released a generic legal advice memorandum that explains the agency’s position on the effect of group membership in determining the arm’s length interest rate of intragroup loans.  

The legal advice memorandum — AM 2023-008 — concludes that if an unrelated lender would consider group membership in establishing financing terms available to a borrower, and third-party financing is realistically available, the IRS may adjust the interest rate in a controlled lending transaction to reflect group membership.  

Generic legal advice memoranda constitute legal advice, signed by executives in the National Office of the Office of Chief Counsel, and are issued to IRS personnel to provide authoritative legal opinions on certain matters, such as industry-wide issues. This memorandum provides non-taxpayer-specific legal advice on the application of IRC Section 482, and it states that the advice should not be used or cited as precedent. However, the memorandum provides insight into the Office of Chief Counsel’s position on the role of implicit support in establishing an arm’s length interest rate in intragroup loans.  

Example

The memorandum provides an example to anchor its analysis of the topic. In the example, a non-U.S. parent company directly owns 100% of the equity of a U.S. subsidiary. The U.S. subsidiary owns operating assets and operates businesses essential to the group’s financial performance. The assumption in the example is that if the U.S. subsidiary’s financial condition were to deteriorate, the non-U.S. parent would likely provide financial support to it to prevent a potential default.  

The example states that the U.S. subsidiary plans to obtain capital through an intragroup loan from its non-U.S. parent. An independent rating agency has determined that the non-U.S. parent has a credit rating of A, whereas the U.S. subsidiary has a BBB rating when the implicit support of the corporate group is taken into account. As an independent entity — that is, without considering the group credit profile and the non-U.S. parent’s implicit support — the U.S. subsidiary would have a credit rating of B. In the example, the A credit rating corresponds to an interest rate of 7%, the BBB credit rating corresponds to an 8% interest rate, and a B rating would result in a 10% interest rate. The non-U.S. parent lends to the U.S. subsidiary at an interest rate of 10%, and the loan is not supported by an explicit guarantee from the parent.  

Analysis   

The starting point of the analysis is Section 482 and the regulations thereunder, which grant the IRS broad authority to adjust the results of a transaction between controlled taxpayers to comply with the arm’s length standard. In the context of intercompany lending, this means that the IRS may adjust the interest rate charged so that it is an arm’s length rate, which is generally the rate that would be charged in independent transactions between unrelated parties. The regulations specify that to determine an arm’s length interest rate, “[a]ll relevant factors shall be considered, including … the credit standing of the borrower.” 

The memorandum concludes that the IRS may adjust the interest rate of the foreign parent’s loan to the U.S. subsidiary to 8%, the arm’s length interest rate the U.S. subsidiary would pay to an unrelated lender based on its BBB rating (if the implicit support by the foreign parent is taken into account). This rate reflects the amount the U.S. subsidiary would be willing to pay at arm’s length considering the alternatives available to it. In other words, “the controlled borrower should never accept an interest rate greater than the 8% [at which] it could borrow from the market. In short, the lender may not charge a higher interest rate based on a controlled relationship with the borrower, because an uncontrolled borrower would not accept a higher interest rate than what it could obtain from an uncontrolled lender.” 

Tax Planning Considerations 

The guidance provided in the IRS memorandum is largely consistent with Chapter X of the OECD transfer pricing guidelines, released February 11, 2020, which provides guidance on the transfer pricing aspects of financial transactions. The IRS memorandum summarizes the agency’s long-held position on its review of intercompany loans, particularly those to U.S. borrowers. 

The IRS position on implicit support is reflected in Eaton Corp v. Commissioner, No. 2608-23, which as of September 2024 was pending in U.S. Tax Court. In that case, although the IRS took the position that interest rates paid by certain U.S. borrowers should be adjusted downwards to consider implicit support, it also disallowed some deductions related to explicit intercompany financial guarantees executed with respect to the related intercompany borrowings. 

Given the above, it will be important for multinational entities, particularly non-U.S.-based groups, to review their intercompany loan agreements and evaluate whether the implicit support derived from group membership is reflected in the interest rates charged to related borrowers. Borrowers should also consider whether any existing intercompany financial guarantees are still warranted, and if so, whether they should be adjusted to first consider implicit support before the application of explicit support. 

How MGO Can Help

Our tax professionals can help your business navigate transfer pricing and BEAT compliance with tailored strategies designed to reduce risk and enhance tax efficiency. Reach out to our International Tax team today to see how MGO can support your transfer pricing strategy.

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