A lot of real estate investors I know are active participants- meaning they love real estate so much they have made it their full time business.
If that is the case for you, there is a pretty good chance that recent credits & deductions may benefit you for improvements in your business.
Since tax savings are one of factors of return for real estate investment, make sure you understand these to ensure you are getting the best benefit.
The Background:
In July 2025, the One Big Beautiful Bill Act (OBBBA) restored full, immediate expensing of domestic research and experimental (R&E) costs under new Internal Revenue Code Section 174A, and put in place a credit for innovation under section 41.
For real estate investors and developers who fund genuine innovation — new construction methods, custom building systems, or proprietary technology — this is one of the more consequential tax changes in years, and 2025 was the first full year to claim it.
The two benefits are a Deduction and a Credit:
- Section 174A — the ability to deduct qualifying R&E costs in the year incurred, instead of amortizing them over time.
- Section 41 R&D tax credit — a dollar-for-dollar credit, generally in the range of 14–20% of qualified research expenses above a base amount, for taxpayers conducting qualified research.
A real estate business engaged in qualifying activity can potentially claim both.
Who in Real Estate Actually Qualifies
This is the section that matters most. Passive real estate investment — buying, holding, and leasing stabilized property — does not generate qualified research expenses.
The credit is aimed at technical problem-solving, not investment activity. Active real estate businesses more likely to qualify include:
- Developers and general contractors designing custom structural, mechanical, or building envelope systems for challenging sites
- Firms experimenting with new construction methods, modular or prefabricated techniques, or novel materials
- Proptech ventures developing in-house software for leasing, energy management, or building automation systems
- Developers evaluating a property and its location to determine whether it is a suitable site to construct a commercial, residential or mixed-use building
- Developers creating design for a new building or the renovation of an existing building, including building facades and floor plans, to achieve functional requirements and/or meet historic preservation requirements
- Building owners evaluating different building materials to improve designs or meet project requirements for energy efficiency, sustainability or adherence to building regulations
The Four-Part Test
To qualify, an activity must satisfy all four IRS tests:
- Permitted purpose — developing or improving a product, process, or system (a building system, not the building itself as a commodity).
- Technological in nature — grounded in engineering, physical science, or computer science.
- Elimination of uncertainty — at the outset, the appropriate design or method is unknown.
- Process of experimentation — systematic testing and evaluation of alternatives, such as modeling, simulation, or prototyping.
Routine design choices, cost estimating, and standard permitting work do not qualify. The activity has to involve genuine technical uncertainty resolved through testing — not just careful planning.
With today’s AI capability, almost anyone can develop a custom software package for their business, and if improving efficiency, this can potentially qualify for these deductions and credits. Each investor should consult with their CPA to evaluate.
Eligible Costs
Qualifying expenses generally include:
- Wages for employees who perform, supervise, or directly support the research (in-house engineers or architects designing novel systems)
- Supplies consumed in testing (prototype materials, test assemblies)
- 65% of contract research payments made to outside engineers or consultants performing qualified research on the taxpayer’s behalf.
The Section 280C Choice
Starting with tax year 2025, taxpayers claiming the R&D credit must choose one of two paths: claim the full credit and reduce the corresponding Section 174 deduction by the credit amount, or make a Section 280C(c) election to claim a reduced credit while keeping the full deduction. Your CPA should model both scenarios — the better outcome depends on your marginal tax rate and AMT exposure.
Stack It With Other CRE Incentives
The R&D credit is rarely claimed in isolation. Real estate investors should also be evaluating:
- Section 179D — a deduction for energy-efficient commercial building improvements (lighting, HVAC, building envelope). Multifamily buildings of 4 stories or more qualify. Three stories or less do not qualify for this deduction. Owners of Multifamily buildings can apply for energy savings credit, even if they are not paying the utility bill, as in the case of electric that is commonly paid by tenants in a Multifamily building.
- Cost segregation studies — a separate strategy that accelerates depreciation on qualifying building components, often coordinated within the same tax planning cycle.
Action Steps
- Inventory current and upcoming projects involving custom design, new materials, or novel systems, and flag which ones pass the four-part test.
- Capture documentation — design iterations, test results, meeting notes — while the work is happening, not at filing time.
- Separate R&D-related wages and hours from general design and administrative time using time-tracking or activity logs.
- Revisit this analysis every tax year — full expensing under Section 174A is now permanent, and consistent documentation compounds the benefit over time.
Going Forward
For most buy-and-hold investors, OBBBA’s R&D provisions won’t apply. But for active investors including developers, general contractors, and CRE operators pushing technical boundaries — sustainable design, resilient construction, proptech — the combination of restored immediate expensing and the Section 41 credit represents real, recurring tax savings. Talk to your tax advisor before year-end to make sure any qualifying projects are being documented to save at tax time.
CALL TO ACTION:
Many investors we work with are active participants looking to always improve and innovate. If you are looking to grow your investments CONTACT US to share your criteria today.
This article is for general informational purposes only and is not tax or legal advice. Consult a qualified tax professional about your specific situation. We are a licensed brokerage that help Multifamily owners maximize their investment returns when selling, and provide real value to buyers.
References & Sources
- Anchin — “OBBBA, The Research Credit, and Section 174” — https://www.anchin.com/articles/obbba-the-research-credit-and-section-174/
- BDO — “IRS Issues Procedural Guidance on OBBBA Treatment of R&E Expenditures” — https://www.bdo.com/insights/tax/irs-issues-procedural-guidance-on-obbba-treatment-of-r-and-e-expenditures
- Holthouse Carlin & Van Trigt (HCVT) — “OBBBA Restores Immediate Expensing for Domestic R&E Costs” — https://www.hcvt.com/alertarticle-New-RandE-Expensing-Rules-Under-the-OBBBA
- Grant Thornton — “Permanent Full Expensing for U.S. Research in OBBBA” — https://www.grantthornton.com/insights/alerts/tax/2025/insights/full-expensing-of-domestic-research
- Internal Revenue Service — Revenue Procedure 2025-28 (Section 174A / 280C Guidance) — https://www.irs.gov/pub/irs-drop/rp-25-28.pdf
- Cherry Bekaert — “R&D Tax Credit Guide for Construction and A&E Firms” — https://www.cbh.com/insights/articles/rd-tax-credit-guide-for-ae-firms/
- CLA (CliftonLarsonAllen) — “R&D Tax Credit: Construction, Architects, Engineers” — https://www.claconnect.com/en/industries/construction/research-and-development-tax-credit-for-construction-companies
- NAIOP — “Maximizing Tax Incentives for CRE Projects” — https://www.naiop.org/research-and-publications/magazine/2024/Winter-2024-2025/finance/maximizing-tax-incentives-for-cre-projects/
- BPM — “Tax Incentives for Commercial Property Owners and Builders” — https://www.bpm.com/insights/tax-incentives-for-commercial-property-owners-and-builders/
- Congressional Research Service (via Congress.gov) — “The Federal Research and Development (R&D) Tax Credit,” Report R48848 — https://www.congress.gov/crs-product/R48848
