Pay BillRoss Mendheim: Good morning. My name is Ross Mindum, and I’m one of the members of BMSS here in Birmingham, Alabama. Before we dive in and welcome, let me share a little bit about who we are.
Ross Mendheim: BMSS was established in 1991, has grown to become one of the top 100 accounting and advisory firms in the US, with over 300 employees across our family of companies.
Ross Mendheim: We assist clients in a variety of industries and services, providing accounting, advisory, IT, payroll, PEO, and wealth solutions in an effort to bring our clients peace of mind and provide exceptional client service.
Ross Mendheim: Additionally, we’re an independent member of the BDO Alliance USA, one of the nation’s largest associations of accounting consulting firms. Through this alliance, we’re able to combine the personalized service of a local firm
Ross Mendheim: With the resources and reach of a nationwide network, ensuring our clients receive the very best support available. To learn more about who we are and how we can help, you can visit us at BMSS.com.
Ross Mendheim: First, there are a couple housekeeping items to mention. If you have any questions during the webinar, feel free to use the Q&A button located in the Zoom control panel of your screen. We’ll answer all questions at the end of the presentation. There will also be some polling questions if you’d like to receive CPE credit. Just please answer those as they pop up.
Ross Mendheim: We’re very fortunate to have Alan Duncan and Sarah Shirley join us this morning to provide an update for the real estate industry and what we can expect for the remainder of the year.
Ross Mendheim: Before we get started, let me give you a little background information about our speakers. First, Alan rejoined BMSS in 2023, bringing a wealth of experience from his roles as controller and CFO for a private company.
Ross Mendheim: Currently serving as a senior manager in our.
Ross Mendheim: Huntsville office in the Client Accounting Solutions group, Alan leverages his extensive background in both public accounting and managing the back office operations of a rapidly growing company to provide invaluable insights into business operations, financial statement reporting, and accounting systems.
Ross Mendheim: His career in the accounting profession spans several years, during which he has honed his skills and built a reputation for excellence.
Ross Mendheim: His expertise in public accounting has equipped him with a deep understanding of accounting and compliance, while his experience in his corporate role has given him practical knowledge of financial management, budgeting, and strategic planning.
Ross Mendheim: And then our other speaker that we’re fortunate to have is Sarah Shirley, and she joined BMSS in 2020 and now serves as a supervisor in our Birmingham Riverchase office, where she provides tax services to a variety of industries with a concentration specialization in real estate.
Ross Mendheim: She is a dedicated accountant who believes in the power of hard work and cultivating relationships with clients.
Ross Mendheim: Sarah received her Bachelor’s of Accounting from Jacksonville State University.
Ross Mendheim: Welcome, everyone, and thank you for being here today. With that, let’s dive right in. Sarah, I’ll turn it over to you.
Sarah Shirley: Thank you, Ross. I appreciate it. And I’d like to give a good morning to everyone again and just want to go ahead and echo again what Ross said. We really appreciate all of y’all joining us this morning and appreciate the trust that you guys have given us here at BMSS to be your trusted advisors.
Sarah Shirley: So today I’m going to be going through what I like to call a mile wide and an inch deep update of what’s going on in the real estate world, specifically within tax law. Next slide, please.
Sarah Shirley: So, what we’re going to cover today, and if you didn’t see the attendance check, please make sure that you’re checking that.
Sarah Shirley: I’m going to check mine.
Sarah Shirley: So what we’re going to cover today, I’m going to go through a quick refresher on the One Big Beautiful Bill Act, otherwise known as the OBBBA, which is quite a mouthful to say. And we’re going to have a specific focus on the key changes related to individual tax and the real estate industry.
Sarah Shirley: From there, I’m going to dive a little deeper into the newest tax classification that was introduced by the OBBVA, Qualified Production Property, and the new manufacturing deduction that you should be taking advantage of.
Sarah Shirley: Finally, I’m going to wrap up with potentially overlooked business deductions that you also should be writing off on your tax return. Next slide, please.
Sarah Shirley: So, I’m sure we all remember when the One Big Beautiful Bill Act was signed into law last summer on July 4th.
Sarah Shirley: And by we, I really mean tax professionals, because I’m sure those of you who are not in this field have much more important and fun things to focus on that day. So for those of you who are actually enjoying your holiday this time last year, let me give you a quick rundown.
Sarah Shirley: So the OBBBA was one of the first major updates to the tax code under the most recent Trump administration.
Sarah Shirley: However, this is not a bill that was written on a blank slate. The OBBBA is fundamentally an extension and expansion of the 2017 Tax Cuts and Jobs Act that was passed during President Trump’s first term.
Sarah Shirley: So, today, I’m just gonna be focusing on the key individual tax provisions that were passed, as well as real estate-specific provisions. But, if you’d like to hear more details on this bill as a whole, our firm has hosted some wonderful webinars on this that you can find on our website. Next slide, please.
Sarah Shirley: So, let’s quickly review the Tax Cuts and Jobs Act and where we were up until the OBVA was passed. So, for those who aren’t completely familiar, bonus depreciation applies
Sarah Shirley: to property with a tax life of 20 years or less. So think your furniture, vehicles, equipment, parking lots, fencing, that type of thing.
Sarah Shirley: One of the bigger updates in the TCJA was related to these bonus appreciation rules. Specifically, 100% bonus appreciation in the first year was scheduled to phase down over the last few years. So if you all remember, we already phased down to 80% starting in 2023.
Sarah Shirley: which then moved to 60% in 2024 and 40% in 2025.
Sarah Shirley: We were actually scheduled to continue going down to 20% in 2026 with a final sunset in 2027.
Sarah Shirley: But with the passing of the One Big Beautiful Bill Act, that scheduled phase down was actually reversed. So now we have 100% votes appreciation permanently with no sunset in sight, which is a huge win.
Sarah Shirley: But, it’s also important to note that not everyone is going to qualify for that 100% rate that starts in 2025. So, there’s actually a specific cutoff date of January 19th, 2025,
Sarah Shirley: And whether you fall under the old phase down or the new permanent rate depends on exactly when you acquired or started the property, not whether it’s just 2025 or later.
Sarah Shirley: So this matters, of course, for real estate industry specifically, because when you buy an existing property, that contract date for the whole deal controls the rate for every cost seg component inside of that property, even though the closing might happen later.
Sarah Shirley: So, for example, if you signed a purchase agreement before January 19th of 2025, but you didn’t close on that property until after, all of those shorter life pieces we just talked about are still going to be stuck at the 40% rate, not the new 100% rate, purely based off of when you signed the contract, not when you actually closed.
Sarah Shirley: This is what is called the binding contract rule, and I feel like it’s one that often gets easily overlooked, unfortunately.
Sarah Shirley: Within these binding contract parameters, there’s also a 10% rule for newly constructed properties.
Sarah Shirley: This rule basically says that if more than 10% of your total expected construction costs were incurred before that cutoff date of January 19, 2025, again, the old rules still apply here. And incurring costs is broader than just the physical work. That includes
Sarah Shirley: Both your physical work of a significant nature and the accrual of any costs under your accounting method.
Sarah Shirley: So, if you find yourself in that category, you may be able to find some relief through the component deduction. This works on the pieces a cost segregation study would already classify as shorter life property.
Sarah Shirley: But any of those pieces that are added after that cutoff of January 19th can separately qualify for 100% bonus appreciation, even if the rest of the project is still stuck at the old rate.
Sarah Shirley: So this is why cost segregation studies are more important now than they ever have been before. Cost seg studies break out the cost of a building into its components, which is already helpful in normal circumstances to help accelerate depreciation. But now, with 100% depreciation back on the table, it can make all the difference.
Sarah Shirley: So you’re getting the entire value of what a cost seg study identifies, and you’re having it hit your return in year one every year going forward. Next slide, please.
Sarah Shirley: In addition to your bonus depreciation, the One Big Beautiful Bill Act also bumped up our Section 179 expensing limits. So for 2025, the limit was scheduled to be $1.25 million, phasing out once purchases exceeded $3.13 million.
Sarah Shirley: Well, the OBBBA doubled both of those. So now it’s a $2.5 million limit, starting the phase out at $4 million, and then fully gone once your purchases hit about $6.5 million in total.
Sarah Shirley: And of course, these limits are indexed for inflation every year going forward. So for 2026 specifically, that actually crept up to 2.56 million and 4.09 million respectively.
Sarah Shirley: So at this point, those of you who know enough of the tax law to be dangerous are probably asking, well, what’s the difference between 100% bonus depreciation and section 179? Why does it matter what you take if you’re getting a deduction either way?
Sarah Shirley: Well, I’m actually glad that you asked. The main difference you’ll see is that Section 179 is more about control of the deduction amount, whereas bonus depreciation is more about scale of that deduction amount.
Sarah Shirley: So, Section 179 is especially useful when it comes to picking what assets you’d like to elect in to receive a deduction for in a specific tax year.
Sarah Shirley: On the other hand, bonus appreciation is automatic, and it is for all assets in a specific asset class, unless you decide to elect out. And then, if you do decide to elect out, you’re electing out for the entire asset class and all the assets in that class.
Sarah Shirley: Another key difference is that the Section 179 deduction cannot create a loss in any tax year that it’s elected, so you can only receive a deduction up to your taxable income amount.
Sarah Shirley: Bonus depreciation has no income cap, so you can create a tax loss in any year that you do elect him for that.
Sarah Shirley: And bonus depreciation also doesn’t have a cap on the dollar amount that you can deduct in any given year, whereas Section 179 does, which of course is also adjusted for inflation each year.
Sarah Shirley: In terms of order, Section 179 is going to be applied first if you elect in, and then you’re going to have your bonus depreciation kicked in.
Sarah Shirley: And then the last difference is some states don’t allow federal bonus depreciation rules, but they do follow Section 179. So in these cases, Section 179 gives taxpayers an option for any kind of deduction in that state where you otherwise may not have had one. And that’s especially important for our clients who are operating in other business or other states besides Alabama.
Sarah Shirley: Next slide, please.
Sarah Shirley: So Qualified Business Income, otherwise known as QBI, is another Tax Cuts and Jobs Act provision that was set to disappear at the end of 2025. But the passing of the One Big Beautiful Bill Act made it permanent, so thankfully that 20% deduction isn’t going anywhere.
Sarah Shirley: With QBI, though, there are two other changes worth noting with this new bill. So, the first change is that the phase and range was widened. So, this is a window where the specified service trainer business exclusion and W-2 limits
Sarah Shirley: gradually kick in above the threshold. So, it used to be $50,000 for single filers and $100,000 for married filing jointly. Now, it’s $75,000 and $150,000, respectively.
Sarah Shirley: So, for 2026, the phase-in starts at amounts that are normal for inflation indexing. It’s a little over $201,000 for single filers and a little over $403,000 for joint filers.
Sarah Shirley: The wider phase-in applies to the maximum value of that phase-in threshold, which puts single filers at a little over $276,000 and joint filers at $553,000.
Sarah Shirley: The overall net effect of these changes is that the phase out is more gradual. So those people that are just above that line are able to get more of their deduction.
Sarah Shirley: And then the second change that’s worth knowing is a new minimum deduction, which will be indexed for inflation every year, but starting in 2026, taxpayers with at least $1,000 of qualified business income from a business that they’re materially participating in
Sarah Shirley: will receive at least a $400 QBI deduction. And I feel like we can all appreciate any kind of tax deduction, whether it is big or small.
Sarah Shirley: Next slide, please.
Sarah Shirley: So a couple of other quick mentions from the One Big Beautiful Bill Act.
Sarah Shirley: First is the SALT deduction cap, which was raised from $10,000 to $40,000 for married filing jointly filers, which is a huge win, but it is scheduled to sunset in 2030. So, as your fellow tax professional for the duration of our webinar, make sure you’re looking at this when you’re tax planning over the next few years.
Sarah Shirley: I don’t know if y’all are like me, but sometimes I feel like I’m stuck in the early 2000s, and I didn’t realize 2030 is only 4 years away. So, highly encourage you to start looking at this now.
Sarah Shirley: The next item is the estate and gift tax exemption. It was made permanent at $15 million per person, which then, of course, translates to $30 million per couple. And, of course, this will also continue to be indexed each year for inflation.
Sarah Shirley: The third thing I wanted to mention, and if you are doing your polling questions, make sure to click this one.
Sarah Shirley: But the third item that I wanted to mention specifically, is related to the 1031 exchanges. So, the One Big Beautiful Bill Act did not change anything related to the 1031 exchanges, so you can all take a breath.
Sarah Shirley: But I did want to add a quick note that relate to bonus depreciation since we were talking about that earlier in 1031 exchanges.
Sarah Shirley: For 1031 replacement property, only the excess basis, which is the new money above what’s carrying over from your relinquished property, only that is eligible for 100% bonus depreciation via a cost seg study. So the carryover basis just keeps appreciated.
Sarah Shirley: depreciating on its existing schedule. And that’s what has always been the rule, but really up until now, it didn’t matter as much when bonus depreciation was phasing back down to zero. Now that it’s permanently 100%, that distinction can carry a lot more weight. So I wanted to make sure to touch on that.
Sarah Shirley: Next slide, please.
Sarah Shirley: All right, so that covers the update on all the rules that you knew were coming from the One Big Beautiful Bill Act. Now I want to get into the newest tax classification that this act introduced, qualified production property, and the new manufacturing deduction that you should be taking advantage of. Next slide, please.
Sarah Shirley: So you may be asking, why are we talking about a manufacturing deduction in a real estate webinar? How does this apply to me?
Sarah Shirley: Well, this actually touches real estate in a few different ways, so just hear me out. You might own a building leased to a manufacturer, or you might be looking to convert an existing property into a production facility, or you might just have clients in this space that are going to ask you questions. Either way, it’s completely worth knowing in the real estate space.
Sarah Shirley: This whole thing starts with a completely new code section that the One Big Beautiful Bill Act added, Section 168N. And this new section allows for 100% immediate expensing deduction for the portion of non-residential real property used as an integral part of a qualified production activity. So a whole lot of mumbo jumbo. What exactly does this mean?
Sarah Shirley: Well, let me break it down, and I want to start with the 100% immediate expensing deduction, since this is the biggest piece of this new code. So, if you’re not listening, please tune in right now, because this is huge.
Normally, a building like this would sit on that same 39-year depreciation schedule that I had mentioned earlier. Well, this new code section completely throws out that rule for these properties. If your property qualifies, you can elect to deduct depreciation up to 100% of the applicable portion of the property’s basis in your very first year, all at once. So, that is the immediate expensing piece of it. It’s not a faster depreciation schedule, it is the whole thing gone, year one, full stop, which is huge.
So, continuing on the breakdown, the code mentions that the deduction is only available for the specific portion of the property that is used. So, the whole building may not be included if the whole building is not being used for that production activity.
The guidance actually specifically carves out spaces, like your office space, lodging, parking, things like that. But, the space that is used for the production activity can receive that 100% deduction. Now on to the non-residential real property piece. Non-residential real property that would normally be depreciated again over the 39 years. This is including office buildings, warehouses, factories, plants, etc. It is the opposite of residential real property, which is depreciated over 27 and a half years, so this is just your commercial side.
And then it’s also important to mention that there are time limits on the properties that are available for this deduction. And those limits are different depending on how you got the property in the first place. So there are really two options here.
Your first option is for your newly constructed properties. For these, construction has to begin after January 19th, 2025 and before January 1st of 2029. The property also has to be in place in service by the end of 2030 to qualify.
And then your second option is for purchased and acquired properties. So, the big thing about this is your building doesn’t have to be brand new to qualify for this deduction. For example, say you’re buying an existing warehouse that has been sitting vacant, and you want to convert it into a production facility.
Any portion of that building that is directly involved in production can qualify. The only catch for existing properties is that it cannot have been used or qualifying production activity during the look-back window, which they have established to be January 1st of 2021 through May 12th of 2025. Basically, they just don’t want people buying existing manufacturing properties and reclaiming that deduction.
So we’ve defined the 100% deduction piece, and we’ve defined the portion and the non-residential real property. Obviously, your natural next question is probably, what the heck is a qualified production activity? Well, it’s a lot broader than what traditional manufacturing might make you think. If you’ll go to the next slide, please.
So, the code section defines a qualified production activity as manufacturing, production, or refining of a qualified product that results in a substantial transformation of the underlying material. Again, lots of legal mumbo jumbo. Let’s break this one down too.
So we’re talking about manufacturing, production, or refining. The statute specifically limits the production piece to agricultural and chemical production only. However.
The definitions for manufacturing and refining are very broad, which was intentional. Congress deliberately left those two terms open-ended, so almost any process where you’re taking raw materials and turn them into a genuinely different finished product could potentially count here.
And that leaves the door a lot wider than the word manufacturing, I feel like, might suggest. So what does substantial transformation look like?
This is really the heart of the test of this deduction. The Treasury gives us examples of what it considers to be substantial transformations, specifically including wood pulp into paper, steel rods into screws and bolts, fresh fish into canned fish.
Like I said earlier, you’re taking that raw input and turning it into something genuinely different. Assembly parts or packaging finished goods or storing finished products do not count for this here. So, basically, if you’re not fundamentally changing the product, it’s probably not gonna qualify.
The coolest thing about this is that it can include so much more than what we assume traditional manufacturing includes. So for example, a coffee company that’s roasting green beans and then turn them into ground coffee. That’s a substantial transformation. A natural gas facility that is taking natural gas and turning it into a liquid form? Same thing. The key here is that you shouldn’t let the word manufacturing
Make you assume that this doesn’t apply to you or your client. The only other main exclusion I did want to flag here is that a qualified product specifically excludes food or beverages that are prepared in the same building as they’re sold. So breweries that are brewing their own beers in-house and then selling them on tap unfortunately don’t apply here. Next slide.
So here’s something that is really common in the real estate industry, as I’m sure a lot of you know. You’ll see the building held in one LLC and then your actual operating business, the one that’s doing the manufacturing, run through a separate entity. Same ownership, just split up for liability protection, estate planning, that type of thing.
It’s a very standard way that we seek to structure things.
Interestingly enough, under the original law as written for qualified production property, that structure actually would have locked you out of this deduction because the statute originally said if you’re a lessor and it’s your tenant doing the manufacturing, you don’t qualify even if you own both sides of that relationship.
Thankfully, the IRS recognized that gap, and they fixed it by issuing Notice 2026-16.
They didn’t want a completely normal way of structuring things in real estate to accidentally disqualify a lot of people from that deduction that Congress clearly intended for manufacturers to get. So as long as the lessor LLC is commonly controlled with the operating company, the lessor can still take the deduction even though it’s not the one doing the manufacturing.
So, if you’re planning to take advantage of this new deduction, we recommend conducting a space segregation study, since it’s only the production footprint that qualifies for the deduction. These are very similar to cost segregation studies, and are necessary for documentation purposes.
And then a few caveats that I do want to quickly mention. There is a 10-year recapture window, so if the property stops being used for manufacturing, you could owe some of that deduction back.
The election is basically irrevocable once you make it, and the Treasury has already indicated they’re watching for abuse. So, things like sale leasebacks or splitting up a building in artificial ways just to game this are a huge no-no.
And as with any tax position, we always encourage you to discuss your eligibility and documentation plans with your tax professional.
So we have covered the One Big Beautiful Bill Act and we have covered qualified production property. The last topic that I wanted to cover is something that I’m asked often by not just my real estate clients, but many of my business clients. And it is what business deductions should I be writing off on my tax return that I might not be thinking of? Next slide, please.
So one thing I always want to remind clients, and there’s another attendance check for those of you that are hitting those poll questions. As I like to remind clients, though, any expense that is genuinely tied to running your business is probably deductible.
But as with all expenses, documentation is key. And if you’re ever unsure, again, please reach out to your tax professional. But with that said, here are some common ordinary and necessary business expenses that you should be writing off each year if they apply to you.
So the first one is cell phones and second phone lines. Of course, with all business expenditures, you want to make sure you have a reasonable business use percentage. And that first line into your residence is going to automatically be considered personal. But a second phone line that is used exclusively for business is 100% deductible. So think about those phone plans where you can add on extra lines. That’s one that you always need to think about if it applies to you.
The next deduction that I always like to point out is the home office deduction. These are available for your Schedule C businesses and Schedule E rental businesses. There’s a three-part test, though, to qualify. So, your space must be, one, used regularly. Two, use exclusively for business, no personal use at all, so you can’t use that guest bedroom, that’s a guest bedroom the rest of the year as an office for this, okay? Then the third test is it’s either your principal place of business, or a place where you regularly meet clients, tenants, or vendors. It doesn’t have to be the only place that you work.
Sarah Shirley: But if you do admin and management work in this space, like your bookkeeping, or scheduling, or paying bills, etc, and you don’t have another fixed location where you’re doing this work, it completely counts.
The next is mileage. For 2026, the standard mileage rate is 72.5 cents per mile, and this is up from 70 cents in 2025. The one thing I do want to flag, because this is something people often miss. you cannot take the standard mileage rate and separately depreciate your vehicle. The rate already has depreciation baked into it, so it’s either one or the other. You can’t do both.
I find that most people find the standard rate to be a simpler option, but if you have an expensive vehicle that have high costs, running the numbers on the actual expenses might be worth it here.
The next deduction I want to mention is travel, education, and your software expenses. For documented business trips, any expenses that you incur for that travel, including your airfare, lodging, and 50% of your meals are deductible.
If you attend continuing education seminars or conferences, those expenses are deductible. And if you use any type of property management software or screening software for tenants, these are also deductible.
Another expense, of course, you need to make sure you’re picking up is your legal and tax prep fees. Any kind of credit card or banking fees, again, those screening fees for your tenants, and any turnover costs that you might incur between tenants, like cleaning fees.
Another fun deduction that I always like to mention is hiring your kids. So I know there are probably some videos circulating. I’ve seen a few on various social media websites about this, and it can be applicable to you. Obviously, they’re within reason. But if your rental activity runs through a sole proprietorship or a partnership where every partner is a parent.
You can pay your minor child a reasonable rate wage for real work. So they actually have to do something. They could do cleaning, guest messaging or tenant messaging, admin tasks, things like that.
It’s deductible to you as a salary expense, and it’s largely tax-free to them, and exempt from FICA if they’re under the age of 18.
Most people also assume that appliances or tools have to be capitalized and appreciated, but that is not true, and that’s another, deduction I wanted to point out. With the De Minimis Safe Harbor Annual Election, you can immediately deduct any item that’s costing you $2,500 or less per invoice, you know, no depreciation schedule required.
And then, of course, business gifts, this is always a fun one, too. Those are going to be capped at $25 a year per recipient per year, but engraving, gift wrap, shipping costs, those little incidental costs are not included in that 25% limit. So, I hope a few of those surprise you. If nothing else.
Go check whether you’re actually using that de minimis selection because it’s an easy one to leave on the table.
And that’s really the fast lap through everything that I had today. OBBBA refresher, new manufacturing deduction that most of you probably didn’t expect to apply to real estate, and a handful of deductions that are easy to miss. So I hope that you’re walking away with at least one thing to go check on for your own properties or your clients.
But I’m going to go ahead and hand it over to Alan now, who is going to take us from the tax code into something a little more forward looking with Opportunity Zones.
Alan Duncan: Yeah, thank you, Sarah. Thank you, Ross, and everyone behind the scenes who worked so hard to make these come together for us. And good morning to everyone who is joining us today. I’m really thankful to have everyone here.
I want to start with a topic that got a significant upgrade this year, and one that is relevant if you own appreciated real estate.If you have a business, hold an investment portfolio with gains sitting in it.
And what we’re talking about is Opportunity Zones. All right, so Opportunity Zones, or you may hear them called Ozones, OZs, they’ve been around since 2017. When they were created as part of the, Tax Cuts and Jobs Act.
And let me walk you through how they actually work. I think once you see it and kind of hear it and understand it, it clicks pretty quickly.
And so it all starts with capital gain. That gain can come really almost from anywhere. Might be the sale of real estate, might be a business, stock, any other appreciated asset.
And within 180 days of that sale, instead of writing a check to the IRS for the gains you’re gonna pay on that.You take that gain, and you invest it into what’s called a Qualified Opportunity Fund, or QOF.
That fund then deploys the capital into a project or a business located within a designated opportunity zone. That can be ground up development. Might be substantial renovation of an existing property. It might be an operating business situated within one of those zones. And once your money is in the fund, the tax clock starts working in your favor. And generally speaking, it gets better the longer you hold. Excuse me. Here’s how that benefit builds over time.
Alan Duncan: So day one, you defer paying tax on that original gain entirely. That money’s now working inside the investment instead of going to the government, where you pay tax on that.
Year 5?under the Opportunity Zone guidance, 10% of that original deferred gain is going to be forgiven.
imply goes away.
For investments made through a Qualified Rural Opportunity Fund, that number jumps from 10% to 30%. We’ll come back to that soon. Year 10, or later, when you used to sell your interest in the fund, all of the appreciation that you have in that investment, everything the investment grew beyond your original contribution to the fun
can come out completely tax-free. That alone is the headline benefit of Opportunity Zones. The original deferred gain does eventually come due, but the growth on top of it is yours to keep. Kind of thinking about that, here’s a kind of a good concrete example to think about.
Say you, sell a piece of commercial real estate, walk away with a $500,000 capital gain.Normally, that’s going to trigger a significant tax bill, might be ordinary income tax rates.With a Qualified Opportunity Fund, you invest that gain within 180 days and defer the tax.Your $500,000 is now working in a real estate project inside an Opportunity Zone.Then at year 5, $50,000 of that original $500,000 gain gets forgiven.At year 10, if the investment has grown to, say, $1.2 million, that $700,000 of appreciation comes out completely tax-free.You eventually do owe tax on a portion of the original gain, but the growth is excluded.
That is a fundamentally different outcome than just paying tax up front. Now, within that structure, the Opportunity Fund itself has some rules to follow to maintain its Qualified Opportunity status. Primary one that you’ll hear about is that at least 90% of the Qualified Opportunity Funds
Assets must remain invested in a Qualified Opportunity Zone project or business.That compliance responsibility sits with the fund manager, not you as the investor, typically speaking, but it’s one reason why evaluating the quality of the fund manager matters as much as the tax benefit itself.
The fund also gets some breathing room on timing. A working capital safe harbor gives the fund up to 31 months to deploy your capital to a qualifying project once the money is raised.
Especially for real estate development, where projects take time to structure, get off the ground.working on plans, fundraising, things that take time. That’s a significant break to have that 31 months working in your favor, and it’s a really meaningful window of time.
Now, at the property level, existing real estate in a zone generally has to be substantially approved to qualify. Now, what that’s going to mean is the investor has to add to the property’s value at roughly the same level as what was already there. New ground-up construction qualifies automatically without that requirement.
Rural projects, as I mentioned earlier, have a lower improvement threshold under the new law.The reason all these requirements exist is that the program is designed to ensure capital actually flows into the communities and creates real economic activity, not just a paper investment where you’re chasing a tax break.
These are substantive obligations, and they’re a reason why the right fund manager and the right underlying project matter as much as the tax structure itself.
That’s something you may ask here if you’re thinking about this is, you know, 10 years is a long time. Is that really realistic?
I think for the sake of Opportunity Zones, the answer is absolutely yes.
For real estate development, these things take time. They’re long-hold investments by nature. Ground-up development, substantial improvement projects, the structure fits naturally here.
It’s not for everyone, but for the right person in the right situation, the math is very compelling.
Alan Duncan: If you want to see which areas near you are in a designated opportunity zone, federal government maintains an interactive map through HUD’s website.
Alan Duncan: Pretty easy to find. You can just generally search HUD Opportunity Zones, or HUD Opportunity Zone Map, and you can pull it right up. It’s also a useful tool if you want to start connecting this to markets or projects you might be thinking about, might be getting into some year-end planning. Good conversation to have.
Alan Duncan: Next slide, please.
Alan Duncan: All right, so here’s what has changed and why the conversation is relevant today.
Alan Duncan: The biggest news is that Opportunity Zones are now permanent law, whereas before this year, the program had a built-in expiration date.
Alan Duncan: Which made long-term planning around it uncomfortable.
Alan Duncan: It mattered greatly on when you came into the deal, and now that uncertainty is gone.
Alan Duncan: Now, the IRS just issued guidance on how the updated rules work just last month, back in June. So everything we’re covering is relatively current.
Alan Duncan: Something someone might ask here is, you know, I heard about this years ago. My advisor may have told me the program was ending. Is it actually different now? The answer is yes, it is genuinely different.
Alan Duncan: The expiration concern that existed before was real, and it was the reason many advisors were reluctant to plan around it. Those benefits around opportunity zones were starting to sunset.
Alan Duncan: Permanent law changes that conversation entirely.
Alan Duncan: Now, on the right side of the slide here, three mechanisms that are worth understanding.
Alan Duncan: So first, when does the original deferred gain become due? Under the new rules, the answer is when you exit the fund.
Alan Duncan: or at the five-year mark from your investment date, whichever comes first. This is actually a change from the original program worth understanding.
Alan Duncan: It was back under OZ 1.0 that a FUR gain was tied to a fixed calendar date. That date was December 31, 2026, the end of this calendar year.
Alan Duncan: Meaning that an investor who got in early, maybe back in 2017, 2018, could defer the gain up to 9 years.
Alan Duncan: Under the the new permanent program, that fixed date is gone.
Alan Duncan: It’s replaced with a rolling 5-year window from whenever you invest. That’s standard… that makes it standardized and predictable.
Alan Duncan: 5 years of deferral every time for any investment made going forward.
Alan Duncan: Now, breaching year five does not mean you have to exit or cash out. It is a tax recognition event.
Alan Duncan: You owe tax on the remaining portion of the original gain at that point.
Alan Duncan: But you keep the investment running because your 10 appreciation exclusion is still waiting on the other side. Those are two separate benefits that work in sequence, not an either-or.
Alan Duncan: So if anyone in the room has an existing Opportunity Zone investment that was made back under OZ 1.0 before the changes took effect, the old December 31, 2026 recognition date does still apply.
Alan Duncan: that date is coming up fast. It’s worth the conversation with your advisor. If that’s something that applies to you, definitely worth keeping in mind as we get closer to the end of the year.
Alan Duncan: Second, on the list here, at year 5, 10% of the original deferred gain is forgiven.
Alan Duncan: Think of that as a program rewarding your patience and the investment.
Alan Duncan: The longer you commit, the more favorable the treatment becomes to you and your investment, and the funds, and the opportunities of business that it’s invested in.
Alan Duncan: Now, there’s an enhanced version of that benefit, specifically for what the new law calls Qualified Rural Opportunity Funds.
Alan Duncan: Investments made through one of these funds, is eligible for a 30% forgiveness of that original capital gain at year 5 instead of the 10%. A meaningful difference over the life of the investment.
Alan Duncan: You know, and what that reflects is a deliberate policy choice to push more and more capital from these capital gains into rural communities.
Alan Duncan: If you’re looking for a project in a rural market or that’s something you’re thinking about or that your goals align with, it’s worth asking your advisor about and considering whether or not that structure might apply to you.
Alan Duncan: Third here, the 10-year exclusion is preserved, hold for 10 years, and the appreciation of the investment is tax-free.
Alan Duncan: like we said, you know, a couple minutes ago, that’s the… that’s really the headline, you know, news of Opportunity Zones, and that core benefit, has survived, unchanged, and… and is just as it existed in the first version of Opportunity Zones.
Alan Duncan: One more thing on the left panel here. The current Opportunity Zone map runs through the end of this calendar year.
Alan Duncan: Governors across the country are actively nominating new zones as we speak. In fact, that 90-day nomination window opened at the beginning of this month on July 1st.
Alan Duncan: it
Alan Duncan: And then we’ll expect to see those, estimate maybe late fall when those new maps come out, and those new maps… those new maps will take effect January 1st.
Alan Duncan: The geography of the program is quite literally being redrawn as we speak, and we’ll soon see where those new opportunity zones exist.
Alan Duncan: Someone might wonder here is, you know, does that mean the zone that I was looking at for a project might not be up on the next map that’s coming out at the beginning of the year?
Alan Duncan: Answer is it is possible, yes, that that could be the case. We’ll soon know in the next, couple months.
Alan Duncan: But it’s, you know, one more reason why year-end 226 is a really important planning date, that’s coming up on our radar to think about, especially if opportunity zones or capital gains are something that you’re thinking about and trying to plan for.
Alan Duncan: Development projects and longer hold periods fit the structure really well.Alan Duncan: Next slide, please.
Alan Duncan: Development projects and longer hold periods fit the structure really well.
Alright, so why does the timing matter so much right now? I think, you know, the…
Alan Duncan: Development projects and longer hold periods fit the structure really well.Alan Duncan: Reason to think about that is planning certainty is back.
Alan Duncan You can now build a serious 10-year strategy around this program without worrying that it disappears on you, or that you’re getting in too late, and you only have a couple years, whereas you could have had, you know, closer to 9 or so if you got in in the beginning of the original Opportunity Zone structure.
Alan Duncan:And real estate is a natural home for Opportunity Zone investing.
Alan Duncan: Development projects and longer hold periods fit the structure really well.
Alan Duncan: One time-sensitive item here is the new IRS guidance makes clear that clients with active opportunities and projects need their documentation in order by December 31st this year.
Alan Duncan: You know, definitely worth having a conversation.
Alan Duncan: With your advisor, if that’s… if that’s not something that’s currently on the agend
Alan Duncan: Another question that’s worth raising here as you’re thinking about these, have curiosity, and I’m considering it as something you’ve been thinking about, is how do I know if Opportunity Zone Project is actually a good investment versus just a tax story that’s dressed up as one?
Alan Duncan: And that is absolutely the right question to ask. You know, the tax benefit is a multiplier on a good investment.
Alan Duncan: But it is not a substitute for one.
Alan Duncan: And, you know, I think it is fair to say that, you know, a bad deal in an opportunity zone would still be a bad deal. And, you know, the discipline to be in the underlying… the discipline for the investment that you’re looking at has to be in the underlying investment and project first.
Alan Duncan: The tax benefit that we’re talking about here simply makes a good deal even better.
Alan Duncan: And many people heard about Opportunity Zones back in 2018 and 19, may have tuned out, moved on, and honestly, if you came to the table late, under the original program, that instinct may have been the right call, depending on when you tuned in to… to that benefit.
Alan Duncan: The original program had a mandatory gain recognition at the end of 2026, so someone who invested in 2022 or 2023 was looking at only a few years of deferral before the bill came due, so it started to possibly make less and less sense the closer we got to the year end of 2026.
Alan Duncan: Math simply got worse the longer you waited.
Alan Duncan: But under new OZ regulations, OZ 2.0, that’s not the case anymore. With the program now permanent, the full runway is restored.
Alan Duncan: Someone looking at this today has the same horizon available to them as someone who got in at the very beginning.
Alan Duncan: Next slide, please.
Alan Duncan: All right, so here’s when to bring this up, or when to think about this. Five scenarios that we have here, certainly not all-inclusive by any means, but if any of these come up in a conversation, whether it’s with your advisor, or you’re thinking about this in your own planning.
Alan Duncan: an Opportunity Zone might be worth a look.
Alan Duncan: So, you know, pending, pending or recent sale of appreciated real estate of a business or securities in your portfolio.
Alan Duncan: If you’re in… if you are involved in real estate development and thinking about how to structure equity in a project.
Alan Duncan: If you have a large capital gain and no clear like-kind exchange lined up.
Alan Duncan: Opportunity zones apply to any type of capital gain, generally speaking, not just real estate.
Alan Duncan: You’re exploring development projects and transitional or lower income markets. This might also be where some of that enhanced benefit of the rural funds might come into play.
Alan Duncan: Or if you’re in a state planning conversation where a long hold period is already part of the picture.
Alan Duncan: A common question here that might come up, especially as we think about some of these points on the slide, is can I use an Opportunity Zone Fund and a 1031 exchange on the same game?
Alan Duncan: I think the thing worth knowing here is that those are actually separate tools that work entirely differently.
Alan Duncan: A 1031 exchange defers gain only from the sale of real property, requires you identify a like-kinding replacement property within a tight timeline, as Sarah was speaking to earlier.
Alan Duncan: An opportunity zone accepts any type of capital gain, a stock, business sale, real estate, and a replacement is your investment in the fund. So those are situations where only
Alan Duncan: One is clearly better fit in situations where an advisor might look at both.
Alan Duncan: Maybe that conversation starts with what the gain is, and where the client wants to go next.
Alan Duncan: Kind of where your goals are and kind of thinking about what it is that that works best for your for your personal situation.
Alan Duncan: All right.
Alan Duncan: And with that, we are done covering Opportunity Zones, and we’re going to move on here, shift gears for a second to our next topic.
Alan Duncan: One that I’m really excited to cover, and that’s gonna be AI, specifically, and AI in real estate.
Alan Duncan: You know, we just covered a planning tool that got a major upgrade this year. Now let’s talk about something that is actively changing how real estate industry operates from day to day. That’s AI in real estate.
Alan Duncan: And real estate has always been a data-intensive business.
Alan Duncan: Thank you. Whether it be comps, cap rates, rent rolls, absorption rates, AI is a faster, more capable way to process all of that at scale.
Alan Duncan: Our friends at Deloitte back in 2025.
Alan Duncan: performed a survey, and the Commercial Estate Outlook found that 76% of CRE professionals were already researching, piloting, or in the early stage of implementation of AI tools.
Alan Duncan: You know, what some of them ask here is, AI, is AI just a buzzword at this point, or is it actually changing how people operate?
Alan Duncan: Both things are true.
Alan Duncan: you know, this is… this is very real. There’s a real tool that is in active use. Firms are using it in real estate right now. The question is not whether AI is coming to your industry. It’s already here. The question is how far along you are in your adoption of that.
Alan Duncan: Next slide, please.
Alan Duncan: All right, so where AI is already showing up. Six use cases on the screen here. Kind of go through them, quickly. Property valuation. AI models generating real-time valuations at scale and speed that traditional appraisals cannot match.
Alan Duncan: Lease abstraction. You know, AIR can read a document, extract, and extract the key terms in minutes.
Alan Duncan: Attorneys, commercial real estate professionals are already using this on a day-to-day basis. I’ll pause on that one for a second, because it illustrates the practical use of this very well. Imagine a CRE team doing due diligence on a portfolio acquisition. Say they have 20 properties, each with a lease that needs to be reviewed.
Alan Duncan: Traditionally, that’s a significant time commitment.
Alan Duncan: These lease documents, typically hundreds of pages. An AI tool can extract key terms, rent, expiration dates, renewals, landlord-tenant obligations from all 20 leases in a fraction of the time.
Alan Duncan: Of course, you still have legal review this, sign off on this, but the grunt work, the heavy lifting, is dramatically compressed. The time saving is real, and it’s happening now.
Alan Duncan: Deal underwriting and due diligence
Alan Duncan: AI screens deals, you know, against investment criteria, flags risk factors, model scenarios automatically.
Alan Duncan: Supports the analyst’s judgment, but it doesn’t replace it. One of the more practical advantages here, the model can be rerun as new information surfaces throughout the due diligence process. So the team sharpens the numbers while there’s still time to adjust the deal terms.
Alan Duncan: Property management, you know, predictive maintenance, occupancy optimization, tenant communication, all handled by AI.
Alan Duncan: These capabilities also feed directly into annual budgeting, capital expenditure planning. The data AI services about a building’s conditions and usage patterns become the foundation of your operating budget, rather than just the guesswork.
Alan Duncan: Portfolio reporting. Automated dashboards that pull live data and generate investor reports without someone manually compiling everything.
Alan Duncan: These are particularly valuable in asset management, investor relations, lender compliance, you know, areas where accuracy and timeliness of reporting is not optional. It is absolutely critical.
Alan Duncan: And then last tier, tenant screening. This one has real compliance implications.
Alan Duncan: You know, fair housing regulations apply whether a decision is made by a person or an algorithm.
Alan Duncan: So, all just… just a few examples here to consider, but absolutely within reach right now, to… to operators and advisors working with, use cases where… where these areas might apply.
Alan Duncan: Next slide, please.
Alan Duncan: Alright, so what does all this mean for you, and, you know, where does the CPA fit in?
Alan Duncan: For real estate owners and investors, staying aware of where AI is being used in your space is not optional anymore. The efficiency gains are real, and the compliance questions, particularly around tenant screening and data privacy, are the new territory that’s still evolving.
Alan Duncan: From an advisor standpoint, AI still handles the data aggregation.
Alan Duncan: Your CPA adds the judgment, the technical expertise, and the knowledge. Knowing what a number says
Alan Duncan: is different from knowing what it means to your specific situation.
Alan Duncan: AI can generate a very polished, confident-sounding output with a flawed assumption baked in in step one.
Alan Duncan: That can set… set the entire operation off… off course, and that’s where professional review still matters.
Alan Duncan: You know, someone in the room might be thinking, you know, as a CPA, are you worried where AI is coming into the space? Is it going to replace what you do? Is it going to replace, you know, kind of what’s being offered here? And our honest answer is, you know, we sincerely think that this makes us more capable.
Alan Duncan: adds a great deal more value to what we’re offering here. This is a significant tool that is made available to everyone, especially to what we’re working on in these engagements where we’re considering what AI can make available to one in achieving their goals.
Alan Duncan: And so when you’re getting an AI-generated analysis of a deal or a projection of your portfolio, I think you need someone who can read it critically with technical expertise and tell you where the assumptions might be shaky, where you may need to continue asking some more questions, modeling it a little more to make sure that it’s as airtight as it can be.
Alan Duncan: And that judgment piece is not something the AI does well for itself. You know, that’s the advisor’s job. That’s that’s where that’s where the, you know, the the human-in-the-loop space really really matters, and€¦ and why it’s the most critical piece of what’s being built.
Alan Duncan: Next slide, please.
Alan Duncan: All right, so practical takeaways here. I want to leave you with three questions worth asking from what we’ve talked about today about AI. Is it worth raising with your advisor that you might be working with, reflecting on these if you’re just thinking about these on your own?
Alan Duncan: First is, you know, are you using AI tools in your real estate operations? And if so, who’s validating the outputs in what you’re doing there? Most teams are already using something informally.
Alan Duncan: The gap is usually in who is reviewing what comes out of what is being done there.
Alan Duncan: Second, how confident are you in financial projections or market analysis these tools are generating for you? AI can sound very certain and still be wrong.
Alan Duncan: That’s where an experienced advisor earns their keep, and is necessary to take what is generated and determine whether or not it goes on to the next level.
Alan Duncan: Third.
Alan Duncan: Have you considered your compliance obligations around AI and tenant screening, property management? This is where, especially working in the multifamily, single-family housing, residential space can matter because those fair housing regulations are not paying attention to whether it’s an algorithm making the call or a person.
Alan Duncan: That exposure’s real, certainly something to think about. Always need to have the right eyes on that to make sure that it’s not getting off course.
Alan Duncan: These are all conversations worth having with your… with your advisor, with your… with your team.
Alan Duncan: we’re always happy to be a resource on these things. You know, these are… these are tools that… that we work with regularly, that we work with… with our clients, with… to… to make sure that they’re maximizing what they’re doing on these, whether it’s us working with our…
Alan Duncan: AI advisory group to help clients determine what the best structure is to let them leverage what’s available now, working with, our, affiliate company, Abacus Technologies here in the family of companies who may be able to come in and help them to.
Alan Duncan: You know, kind of think about the security of their data to make sure that it’s being properly
Alan Duncan: retained in a good environment, where it’s safe, and that it has great integrity to the data to make sure that what’s being fed into the model is optimizing what’s coming out. So, all conversations worth having internally with your advisor, we, of course, all would be
Alan Duncan: Happy to have a conversation with those, with any of those who may be kind of thinking about how to get started on this, or anyone who’s even, you know, kind of along in their journey on this as well.
Alan Duncan: So with that, I think that that covers everything we have on AI, and I will hand it back to you, Ross.
Ross Mendheim: Thanks, Alan, and thank you, Sarah.
Ross Mendheim: and Alan for your time, and we’ve got a we’ve got a few minutes here, so we’ll begin to begin taking questions from from the audience. You have a question, please use the Q and A button in the bottom of your screen, and we’ll go ahead and jump in to these questions. And, and one thing I did see throughout the conversation was, was from a tax planning perspective, that these things are permanent now, where a lot of times
Ross Mendheim: before they’re temporary, so that’s really helpful.
Ross Mendheim: from a planning perspective. Sarah, this one might be for you. There’s a question that says,
Ross Mendheim: does this is on the manufacturing, I think does the qualified production property deduction only apply to brand new construction
Ross Mendheim: Or could I convert a building already owned into a production facility? You want to take that one for us?
Sarah Shirley: Yeah, yeah. And that is a great question. And I feel like something that, again, I want to call attention to this because it’s a huge deal. The qualified production property deduction does not only apply to brand new construction, it applies to brand new construction and existing buildings. Again, that’s why it’s such a big deal. So you can qualify with a new construction if you’re within those time limits that I mentioned.
Sarah Shirley: earlier, that’s the piece where construction has to begin after that cutoff of January 19th, 2025, and before January 1st of 2029.
Sarah Shirley: And the property also has to be placed in service by the end of 2030. And then for an existing building, to qualify for that, you only have to make sure that it wasn’t being used
Sarah Shirley: for a qualifying production property during that look back window and that’s going to be from January 1st of 2021 through May 12th of 2025. So, if you want to take an old warehouse that’s sitting somewhere that you’ve been eyeing and converted into a production facility, that would totally count. So, the main guardrail is that those time frames that I mentioned.
Ross Mendheim: Great. Yeah, that’s a very good question. And we aren’t going to be able to get to being cognizant of the time for our audience and any other questions, but we will make sure we get those answered.
Ross Mendheim: answer to y’all. And thank you for joining us, and again, a huge thank you to Sarah and Alan for taking the time to join us today.
Ross Mendheim: If you’re currently a BMSS client, we appreciate your trust in us. If you’re not a client, we’d love to have the opportunity to speak with you. Again, you can visit us at our website, BMSS.com, for more information.
Ross Mendheim: As a reminder, CPE certificates will be issued in approximately 2 weeks, and a recording of today’s webinar should be on our website by the end of the day today.
Ross Mendheim: You can access the recording as well as upcoming webinars on the news and events section of the VMS website. Again, thank you and have a have a wonderful day.