On July 4, 2025, President Trump signed H.R. 1 — the One Big Beautiful Bill Act — into law. The legislation had passed the U.S. House of Representatives on July 3 by a narrow 218–214 vote, completing a reconciliation process that began months earlier with competing House and Senate drafts.
For private lenders, mortgage fund managers, and REIT sponsors, the enacted legislation contains several provisions that directly affect fund structure, interest deductibility, investor tax treatment, and energy investment strategy. Some provisions that appeared in earlier drafts were removed before enactment. Understanding what is actually law — and what fell out — is essential for accurate planning.
At Geraci LLP, our Corporate and Securities team has tracked the legislative evolution of this bill from early drafts through enactment. Below is a clear breakdown of the final provisions most relevant to REIT sponsors and private lenders, along with practical guidance on what each change means for your fund.
Section 199A: The 20% Deduction Holds — No Increase to 23%
One of the most anticipated provisions in earlier House drafts was a proposed increase to the Section 199A qualified business income deduction — from the current 20% to 23% — along with language making the deduction permanent. For REIT investors, Section 199A allows a deduction on qualified REIT ordinary dividends, reducing the effective tax rate on those distributions significantly.
The proposed increase generated considerable excitement among fund managers and their tax advisors, because it would have translated directly into improved after-tax returns for taxable investors.
The final law did not include this increase. The Section 199A deduction remains at 20%.
What This Means for Fund Operations
Sponsors should continue building investor return projections on the existing 20% deduction. The proposal to move to 23% may return in future tax legislation, but it has no legal force as of enactment.
Critically, the 20% deduction still delivers meaningful value. An investor in the 37% federal bracket receiving qualified REIT dividends pays tax on only 80% of those distributions, reducing their effective rate on that income to approximately 29.6%. For high-income taxable investors in a mortgage fund, this remains one of the most compelling after-tax positioning advantages available through any debt investment structure.
The permanence question is also unresolved. The Tax Cuts and Jobs Act originally set Section 199A to expire at the end of 2025. The One Big Beautiful Bill Act did not expressly extend or eliminate it through a new sunset date in the enacted text — fund managers and their tax counsel should confirm the current legal status as of their next tax planning cycle and monitor any technical corrections or supplemental legislation.
Taxable REIT Subsidiary Asset Threshold Restored to 25%
The One Big Beautiful Bill Act restores the quarterly asset test ceiling for Taxable REIT Subsidiary holdings from 20% back to 25%, effective for taxable years beginning after December 31, 2025.
Background on the TRS Asset Test
A Taxable REIT Subsidiary is a corporation that a REIT can own and that is permitted to engage in activities that would otherwise generate disqualifying income for the REIT — things like active loan sales, operating income from properties taken back through foreclosure, or service businesses associated with the REIT’s investments. The TRS is taxed as a regular C-corporation; the REIT itself remains shielded from income taint.
The asset test limits how large a TRS position can be relative to the REIT’s total assets. When the threshold dropped to 20% under prior law, it constrained the scope of activity REITs could route through their TRS structures. Restoring that ceiling to 25% provides greater room for REITs with meaningful operating businesses, vertically integrated platforms, or diversified investment strategies to hold TRS positions without triggering asset test violations.
Practical Applications for Private Lenders
For mortgage fund sponsors who have elected REIT status and use a TRS to handle loan sales, REO operations, or fee-generating service activities, this is a welcome expansion. It provides more structural headroom to grow these subsidiary businesses without forcing periodic rebalancing to stay under the asset ceiling. Funds approaching the former 20% limit should revisit their asset composition with counsel to confirm how the new 25% threshold changes their compliance posture.
Section 163(j): EBITDA-Based Interest Deduction Cap Through 2029
Section 163(j) of the Internal Revenue Code limits the deductibility of business interest expense for most taxpayers. Before 2022, the limitation was calculated based on EBITDA (earnings before interest, taxes, depreciation, and amortization). Starting in 2022, the law shifted to an EBIT-based calculation — removing the depreciation and amortization addback — which made the cap significantly more restrictive for real estate-intensive businesses.
The One Big Beautiful Bill Act reinstates the EBITDA-based calculation for taxable years 2025 through 2029.
Why This Matters for Leveraged Real Estate Funds
The distinction between EBITDA and EBIT is consequential for real estate lenders and fund investors because real estate assets carry substantial depreciation. Under EBIT, that depreciation reduces the base used to calculate the maximum deductible interest, making it harder to fully deduct interest on borrowed capital. Under EBITDA, depreciation and amortization are added back to earnings before applying the 30% cap, which allows a larger portion of interest expense to remain deductible.
For leveraged mortgage funds and their sponsors, this means a more favorable interest deductibility environment for the next five years. Fund models that assumed EBIT-based limitations from 2025 forward should be revisited to reflect the improved deductibility picture under EBITDA calculations.
The existing “electing real property trade or business” exception under Section 163(j) remains intact. Businesses that make this election opt out of the 163(j) limitation framework entirely — at the cost of being required to use a longer depreciation schedule under the alternative depreciation system. Funds and sponsors who have already made this election are unaffected by the EBITDA/EBIT change.
Energy Tax Credits: Accelerated Phase-Out Affects Green Capital Strategies
The One Big Beautiful Bill Act significantly accelerates the phase-out of renewable energy tax incentives, with direct consequences for REITs and investors who have incorporated clean energy assets into their capital strategies.
Section 48E Energy Investment Tax Credits
Section 48E provides investment tax credits for qualifying clean energy projects. Under the enacted legislation:
- Projects that begin construction more than 60 days after enactment lose eligibility for the credit.
- Projects placed in service after December 31, 2028 are also ineligible, regardless of when construction began.
- Transferability of energy investment tax credits is repealed for projects that begin construction more than two years after the date of enactment.
Implications for REIT Sponsors With Green Asset Exposure
REITs that have been developing or financing solar installations, battery storage projects, energy efficiency retrofits, or other clean energy infrastructure as part of their investment strategy face a compressed timeline. Projects that cannot achieve a construction start within the 60-day window or placement in service before the end of 2028 will lose access to these incentives.
For fund managers evaluating clean energy investments as a component of their REIT strategy, the conversation has shifted from planning around incentives to accelerating existing commitments or reconsidering the economics of projects that cannot meet the new timelines. Alternative structuring approaches — including repositioning investments through a TRS or evaluating whether projects qualify under any remaining credit provisions — should be explored with tax counsel promptly.
Section 899 Foreign Investor Provisions: Removed From Final Law
An earlier version of the legislation included Section 899, which would have imposed retaliatory withholding surcharges on foreign investors in U.S. real property and REIT distributions, responding to foreign taxes imposed on U.S. persons abroad. This provision created substantial concern among fund managers with international investor bases.
Section 899 was removed by the Senate and is not part of the enacted law.
The foreign investor withholding environment for REIT distributions returns to the pre-bill status quo. Existing statutory withholding rates and bilateral tax treaty rates apply. No additional surcharges are imposed on REIT dividends paid to foreign investors under the One Big Beautiful Bill Act as enacted.
For funds with overseas capital — particularly investors from countries with favorable U.S. tax treaty arrangements — the REIT structure’s existing foreign withholding advantage remains intact. Treaty-reduced withholding rates, which can be as low as 5% for investors from certain treaty-partner countries compared to the standard 30% statutory rate, continue to make REIT dividends significantly more attractive than K-1 income for non-U.S. participants.
How Geraci LLP Is Advising Clients Under the New Law
The enacted provisions create several immediate action items for REIT sponsors and fund managers:
Review TRS asset positions. With the asset ceiling restored to 25% effective January 1, 2026, funds that were constrained by the 20% limit should model whether expanded TRS capacity changes their optimal structuring.
Rerun interest deductibility models. The EBITDA-based Section 163(j) calculation applies from 2025 through 2029. Any financial model built on the more restrictive EBIT-based cap should be updated to reflect improved interest deductibility.
Accelerate or exit energy investment positions. The 60-day construction start window and December 31, 2028 placed-in-service deadline are firm. Funds with active green capital projects need immediate attention.
Confirm Section 199A planning with current law. The 20% deduction holds. Build investor return materials on that basis, and monitor technical corrections or supplemental legislation for any changes to the sunset question.
Confirm foreign investor withholding treatment. Section 899 is gone. Existing treaty-based reduced withholding rates apply, and no new surcharges affect current or planned foreign capital.
The Broader REIT Value Proposition Remains Intact
The One Big Beautiful Bill Act did not eliminate the core advantages that have made mortgage REITs a dominant structure in private lending since 2017. The Section 199A deduction, UBTI blocking for tax-exempt investors, state withholding consolidation, and foreign investor treaty benefits all continue to operate as designed. The new law adds structural flexibility through the restored TRS asset threshold and improves the interest deductibility environment through the EBITDA reinstatement.
For fund managers who have already elected REIT status, the enacted law largely confirms the value of that decision. For funds still evaluating the structure, the current environment — with the 20% deduction in effect, improved TRS flexibility, and a more favorable interest expense cap — provides a solid foundation for structuring analysis.
Consult Geraci LLP for REIT Structuring Under Current Law
The intersection of tax legislation and private lending fund structure is exactly where Geraci LLP brings over 15 years of focused expertise. Our Corporate and Securities team advises on REIT formation, Sub-REIT subsidiary strategy, TRS structuring, investor tax optimization, and compliance with evolving IRS requirements — for clients nationwide.
If the One Big Beautiful Bill Act raises questions about your fund’s current structure or creates planning opportunities you want to evaluate, contact us.
Our team is ready to advise on how your fund or REIT can position itself under the 2025 tax landscape.
