As the Trump administration and a Republican-controlled Congress prepare to extend and expand the Tax Cuts and Jobs Act (TCJA) of 2017, the commercial real estate (CRE) industry is bracing for significant changes in 2025. With key provisions set to expire at the end of the year, proposed tax policies—ranging from reinstating 100% bonus depreciation to extending pass-through deductions—are poised to influence cash flow, investment strategies, and market dynamics. However, these tax cuts come with trade-offs, including potential inflationary pressures from tariffs and increased federal deficits, which could complicate the CRE landscape. This article explores the potential impacts of these policies on CRE markets, drawing on industry insights and economic analyses.

 

Key Proposed Tax Cuts and Their Direct Impacts on CRE

 

  • Reinstatement of 100% Bonus Depreciation

    The TCJA allowed businesses to immediately deduct 100% of the cost of qualifying assets, such as real estate improvements, but this provision has been phasing out (set to drop to 40% in 2025 and 0% by 2027). The proposed Republican tax plan seeks to restore 100% bonus depreciation for assets acquired after January 19, 2025, and placed in service before 2030. This change could significantly boost CRE investment by freeing up cash flow for reinvestment, enabling property owners to upgrade facilities or expand portfolios without immediate tax burdens. For example, multifamily investors could use the deduction to fund renovations, enhancing property values and rental income. Industry experts note that bonus depreciation historically fueled price increases during CRE booms, as it allows investors to defer taxes on appreciating assets.

 

  • Permanent Extension of Section 199A Pass-Through Deduction

    The Section 199A deduction, which provides a 20% deduction on qualified business income (QBI) for pass-through entities like partnerships and S corporations, is set to expire at the end of 2025. Republicans propose making this deduction permanent and potentially increasing it to 23%. Since many CRE businesses operate as pass-through entities, this extension would reduce tax liabilities, enhancing after-tax returns for developers, investors, and property managers. The National Association of Realtors (NAR) and other industry groups have lobbied heavily for this provision, citing its role in leveling the playing field for small and mid-sized CRE firms. A permanent deduction could stimulate investment in new projects, particularly in high-cost urban markets.

 

  • Preservation of Like-Kind Exchanges (Section 1031)

    The TCJA preserved like-kind exchanges, which allow investors to defer capital gains taxes by reinvesting proceeds from property sales into similar assets. While Vice President Kamala Harris has supported limiting this provision for high earners, President Trump has not explicitly addressed it, though his administration is likely to maintain or expand it. The ability to defer taxes through 1031 exchanges encourages CRE market liquidity, as investors can roll over gains into new properties without immediate tax penalties. This provision is particularly critical for CRE investors seeking to diversify portfolios or shift investments into emerging markets like Opportunity Zones.

 

  • Capital Gains Tax Reductions

    Proposals to reduce capital gains taxes by 20% could significantly enhance net returns on property sales. For instance, selling a property for a $1 million gain would result in a tax liability of $800,000 instead of $1 million, incentivizing transactions and stimulating market activity. Lower capital gains taxes would particularly benefit high-end CRE markets, such as luxury retail or Class A office spaces, where large transactions are common. However, the impact may be tempered by sector-specific challenges, such as high office vacancies.

 

  • Opportunity Zone Program Renewal

    The TCJA’s Qualified Opportunity Zone (QOZ) program, designed to spur investment in underserved areas, faces uncertainty as its tax benefits are set to expire in 2026. A renewed or expanded program under the Trump administration could attract significant capital to CRE projects in distressed neighborhoods, boosting local property values and fostering commercial development. While the program has faced criticism for inconsistent community impact, its renewal could drive investment in multifamily and retail projects in Opportunity Zones.

 

Broader Economic Implications for CRE

 

While these tax cuts promise to enhance CRE profitability, their broader economic effects could introduce complexities:

 

  • Federal Deficit and Interest Rates:Extending TCJA provisions and introducing new tax cuts are estimated to add $3.8–$5.1 trillion to the federal deficit over the next decade. Increased borrowing to finance these cuts could push interest rates higher, raising borrowing costs for CRE projects. The Federal Reserve has projected its target rate to stabilize between 3.75% and 4% by the end of 2025, but tariff-induced inflation could delay rate cuts, further tightening CRE financing.

 

  • Tariff-Induced Inflation: Trump’s proposed tariffs—10–20% on most imports and up to 60% on Chinese goods—could raise construction costs by increasing prices for materials like steel and lumber. Goldman Sachs estimates these tariffs could reduce GDP growth by 0.5% by mid-2025, potentially slowing CRE development in cost-sensitive sectors like retail and industrial. Higher costs could also exacerbate housing affordability issues, indirectly affecting multifamily CRE demand.

 

  • Sector-Specific Impacts: The CRE market is not monolithic, and tax cuts will affect sectors differently. Multifamily properties may benefit most from bonus depreciation and lower interest rates, as refinancing opportunities improve cash flow for renovations. Conversely, the office sector, grappling with 10% of CRE mortgages maturing in 2024 and persistent vacancies, may see limited relief from tax cuts due to structural challenges like remote work trends.

 

Strategic Considerations for CRE Stakeholders

 

To capitalize on these tax changes, CRE leaders should prioritize the following:

 

  • Stay Informed and Model Scenarios: With tax policy debates ongoing, CRE firms should model after-tax outcomes under different entity structures (e.g., pass-through vs. corporate) to optimize returns. Engaging tax advisors to navigate potential changes in QBI deductions or bonus depreciation is critical.

 

  • Leverage Tax Incentives: Investors should explore opportunities in Opportunity Zones and maximize 1031 exchanges to defer taxes and diversify portfolios. Properties eligible for bonus depreciation, such as those requiring significant improvements, should be prioritized.

 

  • Mitigate Tariff Risks: To counter rising construction costs, developers should secure material supplies early or explore domestic sourcing. Hedging against interest rate volatility through fixed-rate financing can also stabilize project budgets.

 

  • Focus on Resilient Sectors: Multifamily and industrial CRE are likely to outperform office and retail, given stronger fundamentals and alignment with tax incentives. Investors should target markets with strong demographic growth and rental demand.

 

A Final Word

 

The proposed Republican tax cuts, particularly the extension of TCJA provisions like 100% bonus depreciation, Section 199A deductions, and like-kind exchanges, offer significant opportunities for CRE investors to enhance cash flow and drive long-term growth. These policies could stimulate investment, particularly in multifamily and Opportunity Zone projects, while boosting market liquidity through lower capital gains taxes. However, the benefits are tempered by risks, including tariff-driven inflation, rising interest rates, and sector-specific challenges. CRE stakeholders must stay proactive, leveraging tax incentives while mitigating economic headwinds, to navigate this pivotal moment in the market. As one industry expert noted, “Whether the future of commercial real estate investing becomes ‘great again’ depends on how prepared you are to make the most of the opportunities ahead.”

By staying strategic and adaptable, CRE investors and developers can position themselves to thrive in a dynamic 2025 market shaped by tax policy and economic shifts.