With Donald Trump back in the White House and Republicans controlling Congress, construction and real estate companies should anticipate significant tax policy shifts in 2025. While the final details remain uncertain until legislation is signed, a unified government is prioritizing broad tax changes—particularly as more than 30 provisions from the Tax Cuts and Jobs Act (TCJA) approach their scheduled expiration at the end of 2025.
As lawmakers push forward slowly but steadily through a challenging legislative process, considerable uncertainty remains about specific provisions and the timeline for enactment. In the meantime, companies can prepare by modeling how different scenarios could affect their tax profile, cash flow projections, valuation and net income.
Here’s what construction and real estate firms need to know about how potential tax changes could affect raising, deploying and earning returns on capital.
Raising capital
Elevated interest rates make real estate purchases or construction more costly. Republicans may push to reinstate real-estate-friendly provisions in the TCJA to attract investment by stabilizing returns and lowering project costs. Provisions aimed at reducing construction or acquisition costs may also be introduced.
The tax policy crossroads:
- Business interest expense: The business interest expense limitation is one of the biggest balancing factors when considering investment in new projects. The limitation became less favorable in 2022, as required by the TCJA. There is some bipartisan support for implementing a more favorable limit, but it hasn’t been a top priority for either party. Real estate businesses often elect out of this, but some—especially commercial lessors—will find that a more favorable limitation favors accelerated depreciation methods.
- Relaxed limits on deducting interest: Easing the 30% cap on interest expenses may help offset the extra interest paid for the same loan taxpayers may have acquired in 2017. The typical debt cycle means many taxpayers are newly exposed to higher rates (or will be imminent) and the commercial real estate industry is feeling the heat.
- Tax rates on capital and ordinary Income: Lower corporate and, potentially, capital gains rates are part of the strategy to spur more commercial activity and free up more capital for reinvestment.
- Credits for residential property conversions: The new administration may advance the Revitalizing Downtowns and Main Streets Act, offering tax credits for converting older office properties to residential use.
Deploying capital
Some real estate companies and construction businesses face prohibitive costs, as inflation and the cost of capital rose while many deductions diminished. Construction companies have found lesser deductions to be a roadblock to large investments in equipment or supplies, while some lessors cannot make the significant renovations to attract tenants they once could.
Tax and trade policy Crossroads:
- Tariffs: Increased tariffs by the U.S. and its trade partners figure to raise sourcing costs and impact export revenues.
- Bonus depreciation: The ability to deduct the cost of qualified assets began to phase out in 2023. Reinstating 100% bonus depreciation could benefit construction businesses. Trump indicated on March 4 that restoring immediate, full capital expensing is a priority of his, and he hopes to apply this retroactively to Jan. 20, 2025.
- R&D expenses: The tax treatment of R&D expenses became less favorable in 2022. There is bipartisan support for restoring immediate deductibility. Real estate companies may not think of themselves as performing R&D, but many that provide construction, manufacturing and engineering services incur R&D expenses, and any company developing software is likely to have qualifying costs.
Return on capital:
The closer ordinary tax rates get to capital gains rates, the more attractive development and repeated home sales become. Lower capital gains rates would put a premium on structuring projects to achieve capital gains rates on property sales.
The tax policy crossroads
- Capital gains tax rate: A lower rate would incentivize structuring projects for capital gains.
- Corporate tax rate: A lower corporate rate could change the type of entities participating in real estate activities.
- Qualified business income deduction: Extending this deduction would benefit contractors and real estate held in pass-through entities.
- Qualified opportunity zone (QOZ) investments: Extending preferential capital gains treatment for QOZs could spur real estate investments.
- Like-kind exchanges: Deferring gains on real estate sales by investing in qualified property remains a significant tool.
Real estate and construction companies that work closely with their tax advisors can monitor proposals and model how tax changes would affect their cash flows and tax obligations. Being prepared for law changes can help companies make smart, timely decisions once policy outcomes become clearer and experience the greatest benefits.
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