The private lending industry entered a new era on July 4, 2025, when President Trump signed the One Big Beautiful Bill Act (OBBA) into law. Among its sweeping provisions, the OBBA permanently extended the Section 199A qualified business income deduction, restored full bonus depreciation, expanded qualified opportunity zone incentives, and increased the taxable REIT subsidiary threshold. For fund managers and private lenders operating mortgage funds backed by real estate, these changes carry significant implications for how investment vehicles are structured, how investor returns are optimized, and how tax planning is approached going forward.
This article provides a comprehensive analysis of the OBBA’s most impactful tax provisions for the private lending community, with particular emphasis on how Real Estate Investment Trusts (REITs) remain a critical tool for maximizing investor tax efficiency.
The OBBA in Context: Extension, Not Revolution
Before examining the individual provisions, it is important to understand what the OBBA actually represents. The legislation is primarily an extension and permanent codification of tax provisions originally introduced under the Tax Cuts and Jobs Act (TCJA) of 2017. Many of those provisions were enacted on a temporary basis, with built-in sunset dates. The OBBA removes those sunset dates and, in several areas, expands the scope of the original benefits.
For private lenders, the practical effect is certainty. Fund managers who had been reluctant to implement REIT structures due to concerns about the 199A deduction sunsetting now have permanent confirmation that the strategy delivers lasting value.
Section 199A Deduction: The Cornerstone Provision for Private Lending
How the 20% Deduction Works
The Section 199A qualified business income (QBI) deduction allows eligible taxpayers to deduct up to 20% of qualified business income on their individual tax returns. This effectively reduces the tax rate on pass-through business income, functioning as a parallel to the corporate tax rate reduction from 35% to 21% that was also enacted in 2017.
For private lending funds, the mechanics work as follows:
- The deduction is claimed at the individual investor level, not by the fund or REIT entity itself
- Fund investors receive K-1 statements containing the information necessary to calculate their 199A deduction on personal returns
- The deduction applies to ordinary REIT dividends (distributions of rental or interest income), which represent the vast majority of distributions from private lending REITs
- Capital gain dividends from REITs are taxed at capital gains rates and do not qualify for the 199A deduction
Why REITs Are Essential for Lending Funds
Under the standard 199A framework, qualifying for the deduction requires meeting one of two threshold tests related to W-2 wages paid by the business or the unadjusted basis of depreciable property held by the business. Private lending operations, by their nature, typically cannot satisfy either test. Lending funds do not employ large numbers of W-2 workers, and their primary assets are loans, not depreciable property.
However, the 2017 legislation included a critically important provision: REIT dividends qualify for the 20% deduction without regard to the W-2 wage or depreciable property thresholds. This creates a clear and direct path for private lending fund investors to access the deduction that would otherwise be unavailable to them.
Income Threshold Considerations
There is an important nuance regarding income thresholds. Investors with taxable income below approximately $400,000 (increased from $350,000 under the OBBA) may qualify for the 199A deduction even without a REIT structure, as the wage and property tests do not apply below that threshold.
However, the overwhelming majority of accredited investors, family offices, and high-net-worth individuals investing in private lending funds far exceed these income thresholds. For this investor demographic, the REIT structure is effectively the only mechanism through which the 20% ordinary income deduction becomes available.
Clarification: The Deduction Remains at 20%
During the legislative process, certain Senate proposals suggested increasing the deduction to 23%. This provision did not survive reconciliation and was not included in the final bill. The 199A deduction remains at 20% of qualifying REIT dividends. While some media coverage created confusion on this point, fund managers should communicate clearly to investors that the rate is unchanged from its original 2017 level.
Applicability to Taxable Investors Only
The 199A deduction benefits only taxable investors. Tax-exempt entities such as IRAs, pension plans, and charitable endowments investing through a REIT do not benefit from this particular provision, though they receive other significant structural advantages discussed below. Offshore feeder fund structures add additional complexity that requires individualized tax counsel.
The Subsidiary REIT Strategy: Why Structure Matters
Fund-Level vs. Subsidiary REIT Elections
When implementing a REIT for a private lending fund, managers face a fundamental structural decision: elect REIT status at the fund level, or create a wholly-owned subsidiary REIT beneath the existing fund entity.
The industry consensus, reinforced by years of practical implementation experience, strongly favors the subsidiary REIT approach. Understanding why requires examining both the tactical benefits and the risk mitigation this structure provides.
Flexibility and Exit Strategy
When a fund itself elects REIT status, that election is essentially permanent. Revoking a REIT election triggers significant tax consequences, and practically speaking, the only way to exit is to close the fund entirely and launch a new one. During the years between 2017 and 2025, when the permanence of the 199A deduction was uncertain, this created unacceptable risk.
A subsidiary REIT, by contrast, can be wound down relatively simply. If circumstances change, the fund manager can dissolve the subsidiary REIT, transfer all loan assets back to the parent fund, and continue operating under the standard fund structure. This optionality is especially valuable for open-ended funds that may operate for ten, fifteen, or even twenty years.
Handling Non-Performing Assets and Foreclosures
Private lending inevitably involves situations where borrowers default and the fund takes back real estate through foreclosure. REITs have specific income and asset tests that can be complicated by certain types of foreclosed property, particularly hotels, condominium developments, and other properties generating income that does not qualify as “good REIT income.”
With a subsidiary REIT structure, non-performing loans and foreclosed properties can be moved back up to the parent fund entity, which is not subject to REIT income and asset testing requirements. This avoids potential compliance issues that could jeopardize the entire REIT election.
Multi-Strategy and Complex Organizational Flexibility
Many fund managers operate with complex organizational charts involving multiple feeder funds, master funds, and various investment sleeves. A subsidiary REIT integrates cleanly into these structures without requiring the entire organization to operate under REIT rules. This is particularly valuable for managers who are exploring or already engaged in securitization, joint ventures, or other capital markets activities alongside their core lending operations.
The 100 Investor Requirement
One frequently misunderstood aspect of REIT compliance deserves emphasis: the REIT must independently satisfy the requirement of having 100 or more beneficial owners. Having 100 investors in the parent fund does not automatically satisfy this test for the subsidiary REIT. The subsidiary entity must meet this threshold on its own. Fund managers should consult with experienced securities counsel to ensure proper compliance structuring.
Beyond 199A: Additional OBBA Provisions Affecting Private Lenders
Bonus Depreciation Restored to 100%
The TCJA originally provided 100% bonus depreciation for short-lived assets (non-structural property improvements such as furniture, fixtures, and equipment), but phased the benefit down by 20% annually, heading toward complete elimination by 2027.
The OBBA restored full 100% bonus depreciation for assets placed in service after January 19, 2025. While this provision primarily benefits real estate investors and developers rather than lenders directly, its impact on the lending ecosystem is substantial:
- Borrower economics improve: Developers and investors purchasing commercial or residential properties can immediately expense the cost of non-structural improvements, significantly improving project cash flows and after-tax returns
- Demand for private lending may increase: Better deal economics for borrowers translates to more viable projects seeking financing
- Purchase price allocation matters: The allocation between land, building, and short-lived assets in a transaction affects both buyer deductions and seller recapture obligations. Lenders underwriting these deals should understand how depreciation treatment affects borrower financials
The OBBA’s restoration of bonus depreciation is part of a broader legislative theme: incentivizing domestic construction, manufacturing, and investment. Certain structural components may also now qualify for accelerated write-offs under expanded provisions targeting specific industries, further enhancing the economics of real estate development.
SALT Cap: Increased but Still Impactful
The State and Local Tax (SALT) deduction cap was one of the most politically contentious provisions of the 2017 tax reform. Prior to the TCJA, individuals could deduct the full amount of state income taxes and property taxes from their federal taxable income. The TCJA imposed a $10,000 annual cap, which disproportionately affected taxpayers in high-tax states like California and New York.
The OBBA increased the SALT cap to $40,000 but included a phase-down that returns the cap to $10,000 for taxpayers with income exceeding approximately $500,000. In practical terms, this means:
- Most high-income private lending professionals and investors remain constrained by the effective $10,000 cap
- Middle-income earners in high-tax states receive modest relief
- The partnership-level state tax workaround (where a partnership pays state income tax on behalf of partners, bypassing the individual cap) survived despite significant legislative discussion about closing this avenue
For private lending fund managers, the REIT structure provides an additional benefit in this context: because REIT dividends are taxed in the investor’s home state rather than the state where the underlying loans are originated, the multi-state filing complexity and associated state-level withholding burdens are substantially reduced.
Taxable REIT Subsidiary Threshold: 20% to 25%
The OBBA increased the maximum allowable size of a Taxable REIT Subsidiary (TRS) from 20% to 25% of the REIT’s total asset value. A TRS is a corporate entity owned by the REIT that holds assets or conducts activities that would otherwise create problematic income for REIT compliance testing.
Common uses of TRS entities in private lending include:
- Loan sales: Selling loans can generate dealer income that is unfavorable for REIT testing. A TRS can hold and sell these assets without affecting the parent REIT’s compliance
- Foreclosed property management: Hotels, condominiums, and other properties generating non-qualifying income can be parked in a TRS
- REO disposition: Real estate owned through foreclosure that requires active management or significant renovation before sale
The increase from 20% to 25% provides meaningful additional capacity, particularly during periods of elevated default rates. With commercial real estate stress in the office and industrial sectors ongoing in 2025, having more room to hold non-qualifying assets within a TRS without jeopardizing REIT status is a timely and practical benefit.
Qualified Opportunity Zones Made Permanent
The Qualified Opportunity Zone (QOZ) program, originally created by the TCJA with a limited lifespan, has been made permanent under the OBBA with five-year renewal cycles for zone designations. While QOZ investments are not directly part of the REIT strategy, they intersect with private lending in several important ways:
- Capital gains deferral: Investors with significant capital gains can invest in QOZ funds to defer and potentially eliminate tax on appreciation
- Fund sponsorship opportunities: Private lending fund managers may consider sponsoring QOZ vehicles as complementary product offerings
- Increased lending demand: QOZ development activity creates demand for construction and bridge loans in designated zones
- Adjacent property appreciation: Properties near qualified opportunity zones have historically experienced valuation increases as surrounding development improves neighborhood quality and infrastructure
The program applies to both real estate and operating businesses, creating opportunities beyond pure property investment. Zone designations now follow a standardized methodology, reducing the rushed and sometimes problematic designation process that characterized the program’s early implementation.
Carried Interest Rules Preserved
Fund managers and real estate investors had expressed concern that the OBBA might extend the holding period required for long-term capital gains treatment on carried interest. Under current rules, real estate assets qualify for the favorable carried interest treatment after a one-year holding period, compared to the three-year requirement for non-real estate assets.
The OBBA preserved this one-year holding period for real estate, providing continued favorable treatment for fund managers receiving performance allocations on real estate-backed investments.
Individual Tax Rates: Permanent Reduction
The OBBA made permanent the individual income tax rate reductions originally enacted in 2017, maintaining the top marginal rate at 37% rather than allowing it to revert to the pre-TCJA rate of 39.6%. While this applies broadly beyond the private lending space, it contributes to the overall favorable tax environment for fund investors and real estate professionals.
UBTI Blocking and Multi-State Filing Simplification
Two additional benefits of the REIT structure, while not new provisions of the OBBA, deserve emphasis because the permanent extension of 199A has made them even more relevant by solidifying the case for REIT implementation.
Blocking Unrelated Business Taxable Income (UBTI)
Tax-exempt investors such as IRAs, charitable endowments, and foundations are highly sensitive to Unrelated Business Taxable Income. UBTI is generated when tax-exempt entities participate in leveraged investments or active business operations. Because most private lending funds use leverage, fund investments by tax-exempt entities typically generate UBTI.
A REIT, as a corporate entity, blocks UBTI. Tax-exempt investors receive REIT dividends rather than flow-through income, and those dividends are not classified as UBTI. This opens the fund to an entirely new category of institutional and quasi-institutional investors:
- IRA and self-directed retirement account holders
- Charitable foundations and endowments
- University endowments
- Religious organizations
For fund managers who have reached saturation with traditional accredited investors, the ability to accept tax-exempt capital without UBTI concerns represents a significant capital-raising advantage.
Eliminating Multi-State Filing Complexity
Without a REIT, a fund lending across multiple states must source income to each state where lending activity occurs. This creates K-1 reporting obligations in potentially 15, 20, or more states for every investor, along with varying state withholding requirements. The administrative burden on both the fund and its investors is substantial.
With a REIT structure, investors are taxed on their REIT dividends only in their home state. The multi-state sourcing complexity is captured and resolved at the REIT entity level, dramatically simplifying investor tax reporting and reducing the administrative overhead for fund operations.
Implementation Considerations for Fund Managers
Timing and Planning
With the 199A deduction now permanent, fund managers no longer face the urgency of a potential sunset but also no longer have an excuse to delay. The economic case for REIT implementation is clear for most private lending funds of meaningful size:
- Investor-facing benefit: A 20% deduction on ordinary income distributions is a powerful differentiator when raising capital
- Operational benefits: UBTI blocking and multi-state simplification reduce friction for both the fund and its investors
- Competitive positioning: As REIT implementation becomes standard in the private lending fund space, funds without this structure may face competitive disadvantages in capital raising
Due Diligence Process
Implementing a REIT involves meaningful legal and accounting coordination. The typical process includes:
1. Preliminary analysis: Tax counsel and accountants evaluate whether the fund’s lending activities and asset profile are compatible with REIT requirements 2. Investor education: Existing investors need to understand how the structural change affects their K-1 reporting and tax outcomes 3. Entity formation and documentation: The subsidiary REIT entity is created, operating agreements are drafted, and fund documents are amended to reflect the new structure 4. Ongoing compliance: REIT income tests, asset tests, distribution requirements, and the 100-shareholder requirement must be monitored continuously
Working with Experienced Counsel
REIT implementation for private lending funds is a specialized practice area that requires coordination between securities attorneys, tax counsel, and accounting professionals who understand both the regulatory framework and the practical realities of fund operations. Geraci LLP has extensive experience structuring subsidiary REITs for private lending funds and works closely with leading tax advisory firms to ensure seamless implementation.
Key Takeaways for Private Lenders
1. The 199A deduction is permanent: Fund managers can implement REIT strategies with confidence that the 20% ordinary income deduction for investors will not sunset 2. Subsidiary REIT structures are preferred: The flexibility, risk mitigation, and operational advantages of a subsidiary REIT far outweigh the additional entity management costs 3. Bonus depreciation at 100% improves borrower economics: Lenders should understand how enhanced depreciation rules affect borrower project viability and deal flow 4. TRS capacity increased to 25%: More room to manage non-qualifying assets during periods of elevated defaults 5. QOZ program is permanent: Potential for increased lending demand in designated zones and adjacent areas 6. UBTI blocking opens institutional capital: Tax-exempt investors represent a significant untapped capital source for funds with REIT structures 7. Multi-state simplification reduces costs: Eliminating multi-state K-1 complexity benefits both fund operations and investor satisfaction
Contact Geraci LLP
If you are operating a private lending fund and want to explore whether a REIT structure is right for your business, or if you need guidance on how the OBBA affects your existing fund structure, Geraci LLP’s corporate and securities team is ready to assist.
Geraci LLP 90 Discovery, Irvine, CA 92618 Phone: (949) 403-3488 Website: geracillp.com
