The 2025 federal tax law rewrote depreciation, interest and pass-through rules for property owners. Here is what changed, what did not and why California returns look different.
The One Big Beautiful Bill Act real estate provisions, enacted as Public Law 119-21 on July 4, 2025, made 100% bonus depreciation permanent, raised Section 179 expensing to $2.5 million, created a 100% write-off for new factory space, loosened the business interest limit and made Opportunity Zones permanent. Section 1031 exchanges and carried interest were left alone. California has not adopted these changes.
Public Law 119-21 at a glance for real estate
| Item | Detail |
|---|---|
| Law | Public Law 119-21 (H.R. 1, 119th Congress), commonly called the One Big Beautiful Bill Act; the IRS also calls it the Working Families Tax Cuts |
| Signed | July 4, 2025 |
| Administered by | IRS and Treasury; California taxes are administered by the California Franchise Tax Board (FTB) |
| Biggest commercial real estate changes | Permanent 100% bonus depreciation (property acquired after Jan. 19, 2025); Section 179 to $2.5 million; new Section 168(n); Section 163(j) back to EBITDA; Section 199A permanent |
| Unchanged | Section 1031 like-kind exchanges; carried interest rules |
| Ended or ending | Section 179D for buildings starting construction after June 30, 2026; Section 45L for homes acquired after June 30, 2026; wind and solar credits phased out |
| Key IRS guidance | Notice 2025-42; Rev. Proc. 2025-32; Notice 2026-11; Notice 2026-16; Rev. Proc. 2026-14 |
| California | Generally does not conform; no bonus depreciation and a $25,000 Section 179 limit |
| Status | In effect; interim IRS guidance issued, several regulations still pending |
Key takeaways
- Public Law 119-21, signed July 4, 2025, permanently restored 100% bonus depreciation for property acquired after Jan. 19, 2025. It replaced a phase-down that would have allowed only 20% in 2026.
- For tax years beginning in 2026, the Section 179 expensing limit is $2,560,000, phasing out once qualifying purchases exceed $4,090,000, under Rev. Proc. 2025-32.
- The law left Section 1031 like-kind exchanges and carried interest unchanged, made the 20% Section 199A deduction permanent and restored the EBITDA-based 30% business interest limit for tax years beginning after Dec. 31, 2024.
- The state and local tax (SALT) deduction cap rose to $40,000 for 2025 and $40,400 for 2026, with a phase-down above $500,000 of income, and the entity-level pass-through entity tax (PTET) workaround survived.
- California generally does not conform: the FTB said in March 2026 that state law does not follow the 2025 federal law, so Kern County owners keep two depreciation schedules.
What is the One Big Beautiful Bill Act, and why does it matter for real estate?
Public Law 119-21 is the 2025 budget reconciliation law that extended and rewrote much of the 2017 Tax Cuts and Jobs Act. President Trump signed it on July 4, 2025. The IRS now refers to it as the Working Families Tax Cuts as well as the One, Big, Beautiful Bill.
For commercial real estate, the law mostly made temporary 2017 benefits permanent and added a few new ones. KPMG’s real estate summary says it preserved like-kind exchanges and made “no specific change to the taxation of carried interests.” A NAIOP tax writer described it as a law that “permanently extends 100% bonus depreciation” and “establishes a permanent OZ policy that builds off the original OZ structure.” NAIOP has since renamed itself the Commercial Real Estate Development Association (CREDA).
Before and after: the main provisions
| Provision | Before the 2025 law | After Public Law 119-21 | Who benefits |
|---|---|---|---|
| Bonus depreciation, IRC 168(k) | Phasing down: 40% in 2025, 20% in 2026 | 100%, permanent, for property acquired after Jan. 19, 2025 | Buyers, developers, tenants paying for improvements |
| Section 179 expensing | $1 million limit, $2.5 million phase-out (indexed) | $2.5 million limit, $4 million phase-out; $2,560,000 and $4,090,000 for 2026 | Owner-users and tenants |
| Qualified production property, new IRC 168(n) | Did not exist | Elective 100% write-off for production space; construction begins after Jan. 19, 2025 and before 2029 | Owner-operator manufacturers, not landlords |
| Business interest limit, IRC 163(j) | 30% of income after depreciation (EBIT) | 30% of income before depreciation (EBITDA), tax years beginning after 2024 | Leveraged owners and developers |
| Section 199A deduction | 20%, set to expire after 2025 | 20%, permanent | LLC, partnership and S corporation owners; REIT shareholders |
| Opportunity Zones | Last deferral date Dec. 31, 2026 | Permanent; new zones from Jan. 1, 2027; five-year rolling deferral | Investors with capital gains |
| Section 1031 and carried interest | Allowed / taxed under Section 1061 | Unchanged | Investors and sponsors |
| SALT deduction cap | $10,000 | $40,000 (2025), $40,400 (2026), phase-down above $500,000; $10,000 again in 2030 | Individual owners; PTET still available |
| Estate and gift exclusion | $13,990,000 (2025) | $15,000,000 (2026), then indexed | Families holding property |
| Sections 179D and 45L | Available | 179D ends for construction beginning after June 30, 2026; 45L ends for homes acquired after June 30, 2026 | Loses value for energy-efficient projects |
| New Markets Tax Credit; LIHTC | NMTC expiring after 2025 | NMTC permanent at $5 billion a year; LIHTC state ceilings permanently up 12% | Community development and affordable housing |
How did depreciation and expensing change?
Bonus depreciation, Section 179 and the new Section 168(n) are the three tools that matter most for buildings and the equipment inside them.
Bonus depreciation. Property with a recovery period of 20 years or less that was acquired after Jan. 19, 2025 qualifies for 100% first-year depreciation, permanently. On a warehouse, that means the 5-, 7- and 15-year components a cost segregation study identifies, such as paving, site lighting, dock equipment and qualified improvement property. (A cost segregation study splits a building’s cost into short-life and long-life parts so more of it can be written off sooner.) The IRS issued interim guidance in Notice 2026-11 on Jan. 14, 2026, including an election to take a reduced rate in the first tax year ending after Jan. 19, 2025. Property under a binding contract signed before Jan. 20, 2025 stays on the old phase-down. Our cost segregation guide explains how studies work.
Section 179. The base limit rose from $1 million to $2.5 million, with the phase-out threshold moving from $2.5 million to $4 million, according to KPMG. For 2026, Rev. Proc. 2025-32 sets the figures at $2,560,000 and $4,090,000. Section 179 can cover roofs, HVAC, fire protection and security systems on nonresidential buildings. It is limited to business income, so it suits owner-users more than passive investors.
Qualified production property. New Section 168(n) lets a manufacturer that owns and uses its plant deduct 100% of the production portion of the building. Construction must begin after Jan. 19, 2025 and before Jan. 1, 2029, and the property must be placed in service before Jan. 1, 2031. Landlords cannot claim it for space leased to a tenant. The IRS issued interim rules in Notice 2026-16. Our qualified production property article covers the details.
What does this mean for tenants?
Tenants that pay for and own their interior improvements can depreciate them. Qualified improvement property is 15-year property, so a tenant-funded office build-out or electrical upgrade in a leased Bakersfield building can generally be expensed in year one under 100% bonus depreciation or Section 179.
What changed for financing, pass-through income and investors?
The law restored a friendlier interest limit, kept the 20% pass-through deduction and left exchanges alone.
Interest deductions. Section 163(j) limits business interest to 30% of adjusted taxable income. From 2022 through 2024, depreciation and amortization were not added back, which squeezed capital-heavy businesses. For tax years beginning after Dec. 31, 2024, the law permanently restores the EBITDA-style computation, according to KPMG. Real property businesses can still elect out of 163(j). Electing businesses must use the slower alternative depreciation system for buildings and qualified improvement property under IRC 168(g)(8), so the restored EBITDA rule makes that trade-off less necessary.
Section 199A. The 20% deduction for qualified business income, which also covers REIT dividends, became permanent. Proposals to raise it to 23% were dropped from the final bill, KPMG reported.
Unchanged items. Section 1031 still defers gain on real property exchanges (see our 1031 exchange guide), and the carried interest rules of Section 1061 are unchanged. The excess business loss limit of Section 461(l) was made permanent, which matters to owners hoping to use large bonus depreciation losses against other income. Real estate investment trusts (REITs) may hold up to 25% of assets in taxable REIT subsidiaries for tax years beginning after Dec. 31, 2025, up from 20%.
How did the SALT cap, PTET and estate tax change for property owners?
The individual cap on state and local tax deductions rose from $10,000 to $40,000 for 2025 and $40,400 for 2026. It increases 1% a year through 2029 before returning to $10,000 in 2030. The cap is reduced by 30% of modified adjusted gross income above $500,000 ($505,000 in 2026), but not below $10,000, according to Thomson Reuters.
Earlier drafts would have limited the pass-through entity tax workaround. The enacted law “contains no such limitation,” KPMG wrote, so a property LLC can still pay California income tax at the entity level and deduct it federally. That remains the main SALT tool for many Kern investors; see our California PTET guide.
The federal estate and gift tax basic exclusion is $15,000,000 per person for 2026, up from $13,990,000 in 2025, according to the IRS. That is separate from California property tax: a building passed to children is still reassessed under Prop 19, as explained in our Prop 19 article.
Which energy incentives for buildings ended?
Three incentives lost value or ended in 2026, and one has been tied up in court.
- 179D energy-efficient commercial building deduction: not allowed for property whose construction begins after June 30, 2026, per IRS fact sheet FS-2025-05. Projects not started by that date have lost it.
- 45L energy-efficient home credit: not allowed for homes acquired after June 30, 2026, which affects builders of Kern subdivisions and apartments.
- Wind and solar credits (45Y and 48E): facilities that began construction after July 4, 2026 must be placed in service by Dec. 31, 2027. Notice 2025-42 made the physical work test the only way to show construction began, except for solar projects of 1.5 MW or less.
On June 6, 2026, a federal court in Oregon Environmental Council v. IRS (D.D.C. No. 25-4400) vacated that notice and restored the 5% cost safe harbor, as Troutman Pepper Locke and other law firms reported. No appeal or stay has been reported. Solar landowners should read our article on solar tax credits for commercial projects.
Does California follow the One Big Beautiful Bill Act real estate changes?
Mostly no. The FTB states, “In general, California R&TC does not conform to the OBBBA” (FTB Tax News, March 2026). The 2025 conformity bill, SB 711, moved California’s general conformity date from Jan. 1, 2015 to Jan. 1, 2025, but expressly left out the 2025 federal law. The FTB’s summary of federal income tax changes tracks the differences.
In practice, California allows no bonus depreciation and no qualified production property deduction. Its Section 179 limit is $25,000, reduced once purchases exceed $200,000, per the FTB’s 2025 Form 3885 instructions. California also requires owners to add back the federal PTET deduction on the state return. The state has not adopted the federal depreciation changes.
| Item | Federal | California |
|---|---|---|
| Bonus depreciation | 100% for property acquired after Jan. 19, 2025 | None |
| Section 179 limit / phase-out start | $2,560,000 / $4,090,000 | $25,000 / $200,000 |
| Qualified production property | 100% elective deduction | Not allowed |
| PTET paid by the entity | Deductible by the entity | Credit to owners; federal deduction added back |
| Section 1031 | Allowed for real property | Allowed; out-of-state exchanges reported on FTB 3840 |
What does the 2025 tax law mean for Kern County commercial real estate?
For Kern County owners, the practical read is that the federal changes favor buyers and owner-users, while California’s non-conformity trims the benefit.
- Buyers of existing buildings: after-tax returns improve when a cost segregation study supports large first-year deductions. Regional brokerage reports put Bakersfield’s industrial market cap rate at 7.23% in Q2 2026. Bonus depreciation does not change that yield, but it can change what a taxable buyer nets in the first years. Our cap rate guide explains the math.
- Owner-users: Section 179, bonus depreciation and, for manufacturers, Section 168(n) favor owning over leasing. See our owner-user playbook.
- Farmland sellers: new IRC 1062 lets an owner who sells qualified farmland to an active farmer, subject to a 10-year farm-use covenant, pay the federal tax in four equal annual installments. It applies to sales in tax years beginning after July 4, 2025 and is listed in the IRS’s Form 8824 instructions.
- Investors with gains: the Opportunity Zone program continues with new zones from 2027, and governors nominate tracts during a window that opened July 1, 2026, per IRS release IR-2026-45. See our Kern County Opportunity Zones guide.
- Developers of efficient buildings and solar: the 179D and wind and solar deadlines have passed for projects that had not started, so pro formas that counted on those incentives lose them.
What should owners do now?
- Gather acquisition and binding-contract dates for 2025 and 2026 purchases. They decide whether 100% bonus applies.
- Order cost segregation before filing the return for the year the building is placed in service.
- Model federal and California depreciation separately, plus passive loss and Section 461(l) limits.
- Revisit the 163(j) real property trade or business election with your CPA.
- Decide on the California PTET election for 2026 and calendar its payments.
- Proposed regulations under Section 168(n), further Opportunity Zone guidance and any California conformity proposal in the 2027 budget are the next items that could change the picture.
Worked example: a $10 million Bakersfield warehouse purchase in 2026 (illustrative)
These figures are hypothetical and simplified. An investor LLC buys a Bakersfield warehouse for $10,000,000 and places it in service in 2026. Assume $2,000,000 is allocated to land, which is never depreciable, and $8,000,000 to the building. A cost segregation study moves 20%, or $1,600,000, into 5-, 7- and 15-year property.
Under Public Law 119-21, all $1,600,000 can be deducted federally in year one. Under the 2017 law’s phase-down, only 20%, or $320,000, would have qualified for bonus in 2026, with the rest depreciated over several years. The remaining $6,400,000 is 39-year property under both regimes, about $164,000 a year of straight-line depreciation before any partial first-year adjustment.
California allows no bonus, so the state deduction on the $1,600,000 follows regular schedules. Whether the owners can use the federal loss depends on passive activity rules and the excess business loss limit, so the benefit for a passive investor may be deferred rather than immediate.
| Scenario | Bonus-eligible components | First-year bonus deduction |
|---|---|---|
| Federal, 2017 law phase-down (20% in 2026) | $1,600,000 | $320,000 |
| Federal, Public Law 119-21 (100%) | $1,600,000 | $1,600,000 |
| California | $1,600,000 | $0 (regular depreciation only) |
Frequently asked questions
What did the One Big Beautiful Bill Act change for commercial real estate?
Public Law 119-21, signed July 4, 2025, made 100% bonus depreciation permanent for property acquired after Jan. 19, 2025 and raised Section 179 expensing to $2.5 million. It created a 100% deduction for new manufacturing space, restored the EBITDA-based interest limit and made the 20% Section 199A deduction and Opportunity Zones permanent. It also ended Section 179D for buildings starting construction after June 30, 2026.
Did the One Big Beautiful Bill Act change 1031 exchanges?
No. The law did not amend Section 1031, so real property held for business or investment can still be exchanged for like-kind real property under the same 45-day identification and 180-day closing deadlines. Carried interest rules were also left unchanged. Because California taxes capital gains as ordinary income, deferring state tax through an exchange stays valuable for Kern County owners.
Is bonus depreciation 100% in 2026?
Yes, for qualifying property acquired after Jan. 19, 2025. IRS Notice 2026-11 provides interim guidance. Property acquired under a written binding contract signed before Jan. 20, 2025 stays on the old phase-down, which allows only 20% for property placed in service in 2026. Buildings themselves are 39-year property and do not qualify.
What is the Section 179 limit for 2026?
For tax years beginning in 2026, Rev. Proc. 2025-32 sets the limit at $2,560,000, reduced dollar for dollar once qualifying purchases exceed $4,090,000. California’s limit is far lower at $25,000, phasing out above $200,000 of purchases. Section 179 is capped at business taxable income, so it generally works best for owner-users rather than passive investors.
Does California conform to the One Big Beautiful Bill Act?
Generally no, according to the Franchise Tax Board. California allows no bonus depreciation or qualified production property deduction and limits Section 179 to $25,000. SB 711 updated the state’s general conformity date to Jan. 1, 2025 but excluded the 2025 federal law. Expect different federal and state depreciation schedules.
How does the new SALT cap affect real estate investors?
The individual SALT cap is $40,000 for 2025 and $40,400 for 2026. It shrinks by 30% of income above $500,000 ($505,000 in 2026), never below $10,000, and returns to $10,000 in 2030. The law kept the PTET workaround, so property LLCs and partnerships can still elect California’s PTET and deduct state tax at the entity level.
Can a landlord use the new qualified production property deduction?
Generally no. Section 168(n) requires the taxpayer claiming the deduction to use the building in a qualified production activity such as manufacturing, and property leased to a tenant does not qualify for the landlord. The rule mainly helps manufacturers that own their plants, with construction starting after Jan. 19, 2025 and before Jan. 1, 2029.
If you are buying, building or leasing industrial space in Kern County and want to understand how these rules affect the numbers, call Kern CRE at 661-885-6949 or contact us. We can help you frame the real estate side before you sit down with your CPA. Get Kern County CRE news monthly: subscribe to the Kern CRE report.
Sources
- One, Big, Beautiful Bill and the Real Estate Industry, KPMG LLP, July 10, 2025.
- One, Big, Beautiful Bill provisions (Working Families Tax Cuts guidance hub), Internal Revenue Service, updated Oct. 2, 2026.
- Treasury, IRS issue guidance on the additional first year depreciation deduction (Notice 2026-11), Internal Revenue Service, Jan. 14, 2026.
- Notice 2026-16: Interim Guidance on Special Depreciation Allowance for Qualified Production Property, Internal Revenue Service, February 2026.
- Rev. Proc. 2025-32 (2026 inflation adjustments, including Section 179), Internal Revenue Service, 2025.
- FS-2025-05: FAQs for modification of sections 25C, 25D, 25E, 30C, 30D, 45L, 45W and 179D under Public Law 119-21, Internal Revenue Service, 2025.
- Key Modifications to Energy Credits and Deductions under the One, Big, Beautiful Bill Act, Current Federal Tax Developments, Aug. 21, 2025.
- Notice 2025-42: Beginning of Construction for Wind and Solar Facilities, Internal Revenue Service, August 2025.
- Tax News, March 2026 (2025 Tax Law Changes; SB 711; PTE elective tax add-back), California Franchise Tax Board, March 2026.
- Summary of Federal Income Tax Changes (Public Law 119-21 table), California Franchise Tax Board.
- 2025 Instructions for Form FTB 3885, California Franchise Tax Board, 2025.
- How the One Big Beautiful Bill reshapes SALT planning, Thomson Reuters Tax & Accounting, July 21, 2025.
- From Deductions to Depreciation: Real Estate Tax Impacts of the One Big Beautiful Bill Act, NAIOP (now the Commercial Real Estate Development Association), July 16, 2025.
- 26 U.S. Code 1062, Installment payments of tax on sale of farmland to qualified farmers, Cornell Law School Legal Information Institute.
- 26 U.S. Code 168, including 168(g)(8) electing real property trade or business, Cornell Law School Legal Information Institute.
- What’s new, Estate and gift tax, Internal Revenue Service, updated July 23, 2026.
- IR-2026-45: Treasury, IRS provide guidance to states for nominating census tracts as qualified opportunity zones, Internal Revenue Service, April 6, 2026.
- Instructions for Form 8824 (2025), Internal Revenue Service, April 2026.
- Q2 2026 Bakersfield, CA Industrial Market Report, Lee & Associates, July 2026.
- 26 U.S. Code 179, Election to expense certain depreciable business assets, Cornell Law School Legal Information Institute.
- 26 U.S. Code 1031, Exchange of real property held for productive use or investment, Cornell Law School Legal Information Institute.
- Capital gains and losses, California Franchise Tax Board.
- 2024 Instructions for Form FTB 3840, California Like-Kind Exchanges, California Franchise Tax Board, 2024.
- District Court Vacates IRS Notice 2025-42, Restoring Five Percent Safe Harbor Option for Beginning of Construction, Troutman Pepper Locke, June 2026.
About this article
Kern CRE prepared this article with help from AI research and writing tools. An editor reviewed the draft, checked its facts against the sources linked above and edited it for accuracy and clarity. It is general information, not legal, tax, investment or financial advice; talk with a qualified professional about your situation.