Regulatory Environment: 1031, OZ, FIRPTA Update

Introduction

The regulatory backdrop for US real estate turned decisively favorable over 2025 and into 2026, and the single document that explains why is the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025. Going into the legislation, the industry feared the loss of the like-kind exchange and the imposition of new taxes on foreign capital. Neither happened. Instead the bill preserved the provisions real estate relies on, enhanced others, and dropped the measures investors had dreaded. The net effect is a tax regime that is, on balance, more supportive of property investment than the one it replaced, which is worth knowing cold because regulatory questions surface constantly in interviews and on live deals.

The headline is what did not change. The Section 1031 like-kind exchange, which lets investors defer capital gains and depreciation recapture indefinitely by rolling proceeds into replacement property, survived fully intact despite repeated proposals to cap or kill it. For an industry that runs on tax-deferred recycling of capital, preserving 1031 was the most important outcome of the entire bill, and the mechanics behind it are covered in real estate tax fundamentals.

Two REIT-specific changes were also favorable. The cap on the value of taxable REIT subsidiary (TRS) securities a REIT may hold rose from 20% to 25% of total assets for tax years beginning after 2025, giving REITs more room to run operating businesses inside the structure, as explained in taxable REIT subsidiaries. Separately, the 20% deduction for qualified REIT dividends under Section 199A was made permanent, locking in a meaningful advantage for REIT shareholders.

The program that changed the most was the Opportunity Zone incentive, which the OBBBA made a permanent feature of the tax code rather than a one-time program set to expire.

Opportunity Zone

An Opportunity Zone is a designated economically distressed area where investors who roll capital gains into a Qualified Opportunity Fund receive tax benefits, including deferral of the original gain and, if the investment is held long enough, exclusion of new gains. It is a tool for steering capital into targeted communities.

Under the new rules, often called OZ 2.0, investments made after December 31, 2026 receive a rolling five-year deferral with a 10% basis step-up at year five, and the exclusion of new gains on investments held at least ten years is preserved. A new set of zone designations takes effect January 1, 2027, overlapping with the old zones through 2028. The bill also created a Qualified Rural Opportunity Fund that grants a richer 30% step-up at year five to steer capital into rural areas, alongside expanded annual reporting on fund activity and community impact.

The Foreign Investment in Real Property Tax Act (FIRPTA) remains the baseline rule governing foreign investment in US real estate, and the OBBBA left its core structure unchanged. A foreign seller of a US real property interest is generally subject to 15% withholding on the gross sale price, and dispositions are taxed as effectively connected income. One practical update is administrative: the IRS is moving FIRPTA withholding payments to electronic submission through EFTPS.

The important nuance for REIT investing is the publicly traded exception: a capital gain distribution from a publicly traded REIT to a foreign investor who held no more than 10% of the REIT during the prior five years is not subject to FIRPTA. That carve-out, combined with the dropped Section 899 and preserved Section 892, is precisely why public REITs remain a favored vehicle for foreign capital seeking US real estate exposure, the cross-border mechanics of which are detailed in cross-border real estate deals, FIRPTA, and CFIUS. Taken together, the 2025 to 2026 regulatory cycle landed as a clear positive for real estate: the provisions that matter most were preserved, and the threats to foreign capital were defeated.