On June 16, 2025, the U.S. Senate Finance Committee released its version (the “Senate Bill”)[1] of the “One Big Beautiful Bill Act” passed by the U.S. House of Representatives on May 22, 2025 (the "House Bill”).[2] This alert summarizes the changes made by the Senate Finance Committee to the House Bill to the extent those changes impact real estate investment trusts (“REITs”) and their shareholders. (See Sullivan’s Client Alert regarding the House Bill here.) In general, it is a mixed bag for REITs – some changes are positive; some changes are negative. We start with the positive changes.
Limitation on Business Interest Deduction[3]
The limitation on business interest deductions in Section 163(j)[4] was more favorable to taxpayers for the period through December 31, 2021 than it is currently. Through December 31, 2021, the Section 163(j) limitation generally was calculated as the product of 30% multiplied by an adjusted taxable income amount which was roughly equivalent to earnings before interest, taxes, depreciation and amortization (“EBITDA”). For periods beginning after December 31, 2021, Section 163(j) calculates the 30% limitation based on an amount which is roughly equivalent to earnings before interest and taxes (or “EBIT”, i.e., an amount after depreciation and amortization). When the Section 163(j) limitation starts to pinch, most REITs make the irrevocable election for “electing real property trades or businesses” to avoid the Section 163(j) limitation altogether.
Like the House Bill, the Senate Bill would apply the more favorable EBITDA calculation starting in 2025. Unlike the House Bill, the Senate Bill would make the more favorable EBITDA calculation permanent (whereas the House Bill would revert back to the EBIT calculation after 5 years). In an additional change to the House Bill, the Senate Bill calculates the Section 163(j) limitation prior to the application of any interest capitalization provisions.[5] As before, the exception for “electing real property trades or businesses” would remain available.
Energy Tax Credits and Transferability[6]
The energy tax credit used by many REITs currently is the energy investment credit under Section 48E (the “Energy ITC”). The House Bill would terminate the availability of the Energy ITC for facilities (i) the construction of which begins after the date which is 60 days after the date of enactment of the House Bill or (ii) which are placed in service after December 31, 2028. The House Bill also would restrict access to the credit for certain prohibited foreign entities (“PFEs”) by (i) disallowing any credit for a facility that commences construction after December 31, 2025 that includes any material assistance from a PFE and (ii) disallowing any credit for a PFE for taxable years beginning after enactment. Lastly, the House Bill would repeal the transferability of Energy ITCs for facilities for which construction begins after the date that is two years after the date of enactment.
The Senate Bill would retain current law’s phase out provisions, except that it would phase out the Energy ITC with respect to wind and solar electricity generation facilities (but not for energy storage technology at such wind and solar generation facilities) as follows: (i) for investments the construction of which begins in calendar year 2026, such investments would receive 60% of the credit values; (ii) for investments the construction of which begins in calendar year 2027, such investments would receive 20% of the credit values; and (iii) for investments the construction of which begins after calendar year 2027, the Energy ITC would be eliminated. The Senate Bill would retain the restrictions on PFEs but would not repeal transferability of the Energy ITC.
Increased Rates of Tax on Certain Foreign Persons[7]
The House Bill would add a new Section 899 (Enforcement of Remedies Against Unfair Foreign Taxes), which would increase the rate of tax for an “applicable person” (i.e., a government of or citizen or resident of a foreign country determined to impose “unfair foreign taxes”, which includes digital services taxes and undertaxed profits taxes), including for withholding taxes on dividends and dispositions of U.S. real property interests. Under the House Bill, the rate of tax would increase over the specified rate, whether by statute or treaty, by 5% annually up to an increase of 20% over the statutory rate (without regard to the treaty rate) beginning at the later of three dates: (i) 90 days after enactment of the House Bill, (ii) 180 days after enactment of the discriminatory tax, and (iii) the date that the discriminatory tax begins to apply. In addition, the House Bill would provide that the Section 59A base erosion tax apply to a broader class of foreign corporations in offending countries, increase the base amounts subject to the tax, eliminate offsetting credits, and increase the tax rate to 12.5% rate instead of the baseline 10% rate (the “Super BEAT”).
After the House Bill passed, the real estate industry advocated for changes to Section 899 because foreign investors are pausing investments in U.S. real estate on account of the proposed legislation.[8] The Senate Bill made some favorable changes to Section 899 but did not adopt the changes requested by the real estate industry: among other items, the real estate industry requested an exception for passive or minority investors and grandfathered relief for existing investments.
The Senate Bill would narrow the general scope of Section 899 to apply to foreign taxpayers resident in jurisdictions imposing “unfair foreign taxes” that are “extraterritorial taxes”, which would specifically include taxes imposed under an undertaxed profits rule, but not digital services taxes or diverted profits taxes. The Senate Bill provides for similar “Super BEAT” provisions to certain corporations with respect to a foreign country which has either an “extraterritorial tax” or a “discriminatory tax” (and “discriminatory tax” would specifically include a digital services tax). The Senate Bill would not apply Section 899 before January 1, 2027 (whereas, under the House Bill, Section 899 could apply as early as January 1, 2026). In addition, the Senate Bill caps the retaliatory tax at 15% above the otherwise applicable rate (e.g., a taxpayer subject to a 30% rate reduced to zero by a treaty would be subject to a 15% rate under the Senate Bill; in contrast, the same taxpayer would subject to a 50% rate under the House Bill, which caps the retaliatory tax at 20% above the non-treaty rate). Finally, the Senate Bill makes two clarifications to the House Bill. First, the portfolio interest exemption[9] would not be impacted by Section 899. The second clarification is less favorable – qualified foreign pension plans (which are otherwise excluded from FIRPTA[10]) would be subject to Section 899.
Section 199A Deduction[11]
The House Bill would preserve the eligibility of REIT ordinary dividends for the qualified business income deduction in Section 199A and would make the deduction permanent. The Senate Bill would keep those favorable changes but would not increase the Section 199A deduction from 20% to 23%, as provided in the House Bill.
TRS Asset Test[12]
Unlike the House Bill, the Senate Bill would not increase the 20% quarterly asset test limit on securities of taxable REIT subsidiaries to 25%.
