Property developers across the country miss out on thousands of dollars in tax savings every year. They know how to spot a profitable deal, but when it comes to tax planning, many are leaving money on the table because their CPA treats them like any other small business.

The truth is, property development follows its own set of tax rules—and those rules can dramatically shrink a tax bill when used strategically. The landscape shifted again in July 2025, when the One Big Beautiful Bill Act (OBBBA) became law. The Act locked in permanent 100% bonus depreciation, raised Section 179 expensing limits to $2.5M, created a special 100% depreciation election for certain production-related real estate, and made the Tax Cuts and Jobs Act rules (like the 20% QBI deduction) permanent.

For developers who understand these changes, the opportunities are bigger than ever. What follows is a playbook of the most important tax strategies developers need to know now.

The 2025 Tax Law Changes That Matter for Property Developers

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, reshaped the tax landscape for real estate and development. Here are the provisions developers should pay closest attention to:

100% Bonus Depreciation Is Back — Permanently 

For property acquired after January 19, 2025, bonus depreciation is locked in at 100%. That means you can deduct the full cost of qualifying equipment and certain improvements in the year you place them in service, instead of spreading the deduction over years.

Example: Buy $200,000 worth of construction equipment in 2025, and you could write off the full $200,000 this year. Depending on your tax bracket, that’s $40,000–$60,000 in immediate savings.

Expanded Section 179 Expensing

The Section 179 deduction limit jumped to $2.5 million, with a $4 million phase-out threshold (fully phased out at ~$6.5 million). This is particularly valuable for developers investing in software, vehicles, or certain improvements to nonresidential buildings.

Special Depreciation for Production Property 

The OBBBA introduced a 100% depreciation election for qualified production property—real property used in manufacturing, production (like agricultural or chemical), or refining. While this doesn’t apply to most standard development projects, it’s worth knowing if you’re building specialized facilities.

Permanent QBI Deduction and Loss Limits

The Act also made permanent some TCJA-era provisions that directly affect developers:

• The 20% Qualified Business Income (QBI) deduction is now permanent.

• The limit on excess business losses is permanent too, with ongoing inflation adjustments. This is important for developers generating large depreciation-driven losses.

Interest Deduction Rules (Section 163(j))

OBBBA restored an EBITDA-based test for the business interest limitation, which generally allows more interest to be deducted than under the prior EBIT measure—important for leveraged projects.

Why It Matters for Developers

The 2025 law changes are not small tweaks. They directly affect the way developers plan acquisitions, financing, and exit strategies. With bonus depreciation and Section 179 both expanded, the timing of purchases now has outsized impact. Pair that with permanent QBI deductions and new limits on business losses, and you have a tax environment where smart planning can mean the difference between breaking even and pocketing six figures in tax savings.

Core Tax Strategies Every Property Developer Should Use

Cost Segregation: Your Biggest Opportunity

What It Is

Most developers assume they have to depreciate a building over 27.5 years (residential) or 39 years (commercial). That’s only part of the story. A cost segregation study breaks down a project into components that can be depreciated much faster—often 5, 7, or 15 years. Those shorter recovery periods mean bigger deductions up front.

How It Works

Instead of treating a $2 million project as one asset, a cost segregation study might reclassify:

• $300,000 as 5-year property (carpeting, cabinetry, certain fixtures)

• $200,000 as 7-year property (built-in furniture, equipment)

• $150,000 as 15-year property (landscaping, parking lots, site improvements)

Thanks to 100% bonus depreciation, all those reclassified components can be written off immediately in the year they’re placed in service.

Example: Sarah, a developer in Austin, completed a $1.8 million mixed-use building. Without cost segregation, she would have received about $65,000 in annual depreciation. With a study, $540,000 of assets were reclassified into shorter recovery periods. That meant an additional $78,000 in first-year deductions—and with bonus depreciation applied, her total first-year write-off jumped to $186,000.

Why the IRS Allows It

Cost segregation isn’t a loophole—it’s squarely supported by the IRS and consistently upheld in Tax Court. The key is documentation: a proper engineering-based study is required.

Why It Matters for Developers

Cost segregation is the single most powerful way to accelerate deductions on a development project. For many, it turns years of slow write-offs into immediate cash flow. If you’re putting new property into service in 2025, a cost segregation study should be at the top of your tax planning checklist.

Timing Your Property Purchases and Sales

In property development, the calendar can be just as important as the blueprint. When you acquire equipment, place improvements in service, or close on a sale directly affects whether you qualify for key deductions. With the 2025 law changes, timing has become even more valuable.

Acquisition Date Rules Under OBBBA

For bonus depreciation, the IRS treats property as acquired when you sign a binding contract—not when it’s delivered or paid. 100% bonus applies only to property acquired after Jan 19, 2025, so contracts signed earlier may miss the full write-off even if the asset is placed in service later. That matters because:

• 100% bonus depreciation only applies to property acquired after January 19, 2025.

• If you locked in a contract before that date, even if you didn’t place the asset in service until later, you may miss out on full expensing.

Planning Your Development Timeline

• High-income years: Accelerate purchases and improvements into the current year to maximize deductions when they’ll save the most tax.

• Lower-income years: Consider deferring purchases if deductions would otherwise go unused.

• Sales strategy: If you sell property shortly after taking bonus depreciation, you could face depreciation recapture at ordinary income rates. Planning your holding period reduces surprises at tax time.

Example: A developer planned to purchase $500,000 of heavy equipment in late 2024. By waiting until February 2025 to sign the contract, they qualified for 100% bonus depreciation under the new rules. That decision alone unlocked a potential $100,000+ tax savings for the 2025 filing year.

Why It Matters for Developers

The new bonus depreciation rules reward careful scheduling. Aligning purchases with the right tax year can mean the difference between spreading deductions over decades and writing them off immediately. For developers managing multiple projects, timing isn’t just a logistical concern—it’s a tax strategy.

Like-Kind Exchanges (1031 Exchanges)

A 1031 exchange lets developers defer capital gains tax when selling one investment property and buying another of equal or greater value. Instead of paying tax on the gain at the time of sale, you roll it into the replacement property and keep your capital working for you.

The Timeline Challenge

The IRS sets strict deadlines:

• 45 days to identify potential replacement properties after the sale closes

• 180 days total to complete the purchase

Miss either deadline and the exchange fails—triggering immediate tax. Many developers lose out simply by not planning ahead.

How Exchanges Work in Practice

• Qualified Intermediary required: You can’t take possession of the sale proceeds. A qualified intermediary (QI) must handle the transaction. If the funds touch your account, the IRS will disallow the exchange.

• Escrow of proceeds: The money from the sale must be held in escrow or another restricted account until it’s used to acquire the replacement property.

• Not just one-to-one: A 1031 doesn’t have to be a simple swap. You can exchange one property for several, or several for one, as long as the IRS identification and timing rules are met.

Development Property Considerations

• Investment vs. dealer property: Raw land held for investment can qualify, but property held primarily for sale (dealer property) usually does not. The IRS looks closely at your intent, holding period, and how actively you market or subdivide.

• Build-to-suit exchanges: You can exchange into raw land and construct improvements, but you’ll typically need a qualified intermediary and an exchange accommodation arrangement to “park” the property while improvements are completed and placed in service within the 180-day window.

How the Gain Is Deferred

A 1031 doesn’t erase your gain—it postpones it. The deferred gain is embedded in the carryover basis of the replacement property:

• Your basis in the new property = purchase price – deferred gain.

• When you sell the replacement property later (without doing another 1031), the deferred gain becomes taxable.

• Developers who “swap until they drop” may avoid ever recognizing the gain, since heirs receive a step-up in basis at death.

Example: A developer sells a commercial building for $3 million, with a $1 million gain. By using a qualified intermediary to hold the proceeds and purchasing a $3.2 million mixed-use property within 180 days, the $1 million gain is fully deferred. The developer’s basis in the new property is reduced by that $1 million, meaning the tax bill is waiting until the next non-1031 sale. Instead of losing $200,000+ to taxes now, the developer reinvests the entire amount into the next project.

Why It Matters for Developers

1031 exchanges are one of the most effective tools for keeping capital gains working for you instead of the IRS. But they only work if set up properly: using a qualified intermediary, meeting the strict timelines, and understanding that the tax isn’t gone—it’s waiting until you exit without another exchange. For developers planning multiple projects, a 1031 can be the engine that keeps deals moving forward.

Developer vs. Dealer Status

The IRS draws a sharp line between being a developer/investor and being a dealer. That classification determines whether your profit is taxed as ordinary income or as lower-rate capital gains. It also decides whether you can use powerful tools like 1031 exchanges.

• Dealer property: Treated like inventory. Gains are taxed as ordinary income, subject to higher rates and self-employment tax. No 1031 exchange eligibility.

• Investor property: Held for investment or rental. Gains can qualify for long-term capital gains rates and exchanges.

What the IRS Looks At

There’s no single test, but common factors include:

• Holding period: Shorter holds (quick flips) look like dealer activity.

• Development activity: Making substantial improvements to boost resale value can point toward dealer status.

• Frequency of sales: Regular, repeated sales of lots or units lean toward dealer treatment.

• Marketing and sales activity: Actively advertising or subdividing property looks more like a business than an investment.

Example: Two developers each buy land:

• Alex subdivides, installs utilities, and sells off 20 lots within 18 months. The IRS treats those as dealer sales, so profits are ordinary income.

• Jordan holds land for six years, leases part of it, then sells the whole parcel as one transaction. The IRS treats it as an investment sale, qualifying for capital gains rates and potential 1031 treatment.

Why It Matters for Developers

The dealer vs. developer distinction is one of the most expensive tax traps in real estate. Getting it wrong can mean paying 10–15% more in taxes—and losing access to 1031 exchanges. Careful documentation of your intent, business practices, and holding periods can tip the scale in your favor. For developers juggling multiple projects, it’s often worth structuring entities so “dealer” projects and “investment” projects are clearly separated.

Entity Structure Optimization

How you set up your development business affects every dollar of tax you pay. Many developers default to a single-member LLC or sole proprietorship, but that can mean higher self-employment taxes, weaker liability protection, and missed planning opportunities.

S-Corporation Election

If your development business generates more than about $60,000 in annual profit, electing S-corp status can save real money.

• Without S-corp: All profits are subject to 15.3% self-employment tax.

• With S-corp: You pay self-employment tax only on your reasonable salary. The rest of the profits flow through free of that 15.3% layer.

Example: A developer nets $200,000. As a sole proprietor, the self-employment tax is about $30,600. As an S-corp, if $100,000 is taken as salary, only that portion bears the tax—cutting the self-employment hit roughly in half.

Multiple-Entity Strategy

Larger developers often use multiple entities to separate risks and optimize taxes:

• Project LLCs: Each major development sits in its own LLC, isolating liability.

• Management S-Corp: A separate management company charges fees to the project LLCs, pulling income into an entity that can use payroll strategies to reduce taxes.

• Investment vs. dealer property: Holding long-term investments in one entity and short-term development in another helps support the IRS distinction (and preserve capital gains treatment where possible).

1031 Exchanges and Ownership Structures

One trap to avoid: partnership or LLC membership interests don’t qualify for 1031 exchanges. The IRS treats them as personal property, not real estate. If multiple investors want exchange eligibility, they may use a tenancy-in-common (TIC) arrangement instead, where each investor holds a direct interest in the property. TIC ownership is more complex, but it keeps the door open for 1031 planning.

Why It Matters for Developers

The wrong entity choice can bleed cash to taxes and expose personal assets to unnecessary risk. The right structure does three things:

1. Minimizes self-employment taxes

2. Protects each project from liabilities of the others

3. Preserves flexibility for exchanges and capital gains treatment

Entity planning isn’t just paperwork—it’s the backbone of a developer’s tax strategy.

Advanced Strategies for High-Volume Developers

Installment Sale Treatment

An installment sale allows you to spread out the recognition of gain over the years you receive payments. Instead of paying tax on the entire profit in the year of sale, you only pay tax on the portion of the gain included in each installment payment.

Why It Helps Developers

For developers who seller-finance projects or agree to payment terms that extend beyond the current tax year, installment treatment can:

• Smooth out taxable income over multiple years

• Keep you in a lower tax bracket

• Reduce the risk of triggering the Net Investment Income Tax (NIIT) in one big year

• Improve cash flow by aligning tax liability with actual cash received

Key Rules

• Eligible property: Most real estate qualifies, but dealer property (inventory held for sale) is excluded. That means this strategy typically works for investment properties, not short-term flips.

• Interest requirement: You must charge adequate interest on the note; otherwise, part of the payments may be recharacterized.

• Depreciation recapture: Any prior depreciation taken on the property (including bonus or cost segregation deductions) is taxed upfront in the year of sale, even if you don’t receive all the cash right away.

Example: A developer sells an investment property for $2 million with a $600,000 gain. Instead of taking all the cash upfront, the buyer pays $400,000 per year over five years. Under installment treatment, only $120,000 of gain is reported each year (plus interest income), spreading the tax bill over five years and avoiding a single large spike in taxable income.

Why It Matters for Developers

Installment sales give developers flexibility when exiting projects. They don’t eliminate tax, but they turn a one-time tax hit into a manageable stream, often keeping overall liability lower. Just remember: depreciation recapture is due right away, and dealer property doesn’t qualify.

Development Period Interest and Taxes

During the development phase, interest and property taxes often must be capitalized—added to the basis of the property—rather than deducted immediately. This treatment follows IRS rules under Section 263A (the “UNICAP” rules). It means you don’t get the write-off until the property is sold, placed in service, or depreciated.

Why This Matters

For developers with long project timelines, capitalization can delay deductions for years. That can create a cash flow mismatch: you’re paying out interest and taxes now but waiting years for the tax benefit.

Strategies to Improve the Outcome

• Election to amortize: You may elect under Section 266 to treat certain carrying charges (like property taxes and interest) as capitalized costs and then amortize them over 10 years once the property produces income. This can accelerate some deductions compared to waiting for a sale.

• Proper allocation: Separating land costs from building and site improvements allows faster depreciation on the improvement portion. Allocating interest and taxes proportionally can shift more costs into depreciable categories rather than non-depreciable land.

• Entity-level planning: Developers using multiple entities can sometimes structure financing so that deductible interest is matched to income more quickly (for example, management companies charging fees).

Example: A developer borrows $5 million to build a mixed-use property and pays $400,000 of interest during construction. Instead of deducting that $400,000 immediately, the amount is capitalized into the project’s basis. Once the building is placed in service, the additional basis increases depreciation deductions going forward.

Why It Matters for Developers

Interest and property tax rules can quietly eat into cash flow if ignored. While you can’t always deduct them immediately, smart planning—through elections, allocations, and entity structuring—can make the timing of these deductions far more favorable.

State Tax Considerations

Why States Complicate the Picture

Federal tax planning is only half the battle. State rules for depreciation, exchanges, and business deductions often don’t line up with the IRS. For multi-state developers, this mismatch can create unexpected tax bills—or hidden opportunities.

Key Issues to Watch

• Bonus depreciation decoupling: Many high-tax states (like California, New Jersey, and New York) don’t conform to federal 100% bonus depreciation. You may get the federal deduction now, but state rules might spread it over years.

• Section 179 differences: Some states cap §179 well below federal limits or phase it out differently—model your state impact separately before assuming full expensing.

• 1031 exchange recognition: While most states follow federal 1031 rules, a handful require separate reporting or don’t allow exchanges for out-of-state property.

• Multi-state nexus: Developing across state lines can create filing obligations in multiple jurisdictions, even if the projects lose money.

• Local property taxes: Assessments can spike during construction, and capitalization rules vary by jurisdiction.

Example: A developer in Texas and California invests $1 million in equipment in 2025. Federally, the full $1 million is deductible via bonus depreciation. Texas conforms, so no problem. California does not, so the deduction is spread over several years—leaving the developer with a much higher California tax bill in year one.

Why It Matters for Developers

State tax mismatches can undo the benefits of federal planning if ignored. Before breaking ground, check how the state treats depreciation, exchanges, and business income. For projects spanning multiple states, it often pays to involve a tax advisor experienced in real estate across jurisdictions.

Documentation and Record-Keeping

Property development tax strategies attract extra IRS scrutiny. Big deductions like bonus depreciation, cost segregation, and 1031 exchanges can trigger audits if they aren’t backed up with solid records. The difference between keeping a deduction and losing it often comes down to documentation.

Records You Need to Keep

• Cost breakdowns: Detailed schedules of land, building, site improvements, and equipment for each project.

• Invoices and contracts: Proof of when property was acquired and placed in service—critical for bonus depreciation eligibility.

• Cost segregation reports: Engineering-based studies with supporting workpapers. Generic spreadsheets rarely pass muster.

• Developer vs. dealer status support: Logs showing how long you held properties, your intent at purchase, and how you marketed them.

• 1031 exchange files: Identification letters, intermediary agreements, escrow records, and closing statements showing you met the 45/180-day deadlines.

Planning for 2025 and Beyond

The New Normal for Developers

With the One Big Beautiful Bill Act (OBBBA) in place, developers finally have stability on key tax provisions. Bonus depreciation at 100% is permanent, Section 179 limits are doubled, and the QBI deduction is here to stay. That certainty allows developers to plan projects years ahead instead of guessing what Congress will do next.

Immediate Action Items

To capture the benefits of the new rules in 2025, developers should:

• Review current projects for assets that qualify for 100% bonus depreciation.

• Order cost segregation studies for properties placed in service this year.

• Evaluate entity structures—especially if profits exceed $60,000, where an S-corp election may cut self-employment tax.

• Time major equipment purchases after January 19, 2025, to lock in full expensing.

• Confirm whether projects cross into states that decouple from federal depreciation.

Long-Term Planning

Because many provisions are now permanent, developers can plan with confidence:

• Multi-year project scheduling: Align acquisitions and construction phases with income forecasts to maximize deductions when they matter most.

• Exit strategies: Decide in advance whether sales will be structured as 1031 exchanges, installment sales, or taxable dispositions.

• Estate planning: “Swap until you drop” strategies may allow deferred gains to disappear at death with a step-up in basis for heirs.

When to Get Professional Help

Property development taxation is complex, and the stakes are high. Missed elections, poor documentation, or the wrong entity setup can cost six figures—or worse, trigger an IRS audit. Generalist CPAs often treat developers like any other small business, overlooking the unique opportunities and pitfalls in real estate.

What to Look For in an Advisor

The right advisor should bring more than basic compliance. Look for experience with:

• Real estate development taxation — not just rentals, but ground-up builds and mixed-use projects.

• Cost segregation studies — coordinating with engineers and documenting properly.

• Multi-state compliance — understanding how states diverge from federal depreciation rules.

• 1031 exchanges — including intermediaries, escrow rules, and build-to-suit projects.

• Entity structuring — separating dealer vs. investment property and using multiple entities strategically.

Why Town CPAs

At Town, our CPAs specialize in real estate development taxation. We combine deep technical expertise with AI-enhanced tools to spot opportunities that traditional firms miss. Our team has guided developers through cost segregation, multi-state filings, and complex exchanges—while keeping compliance airtight.

Why It Pays Off

With the 2025 rules now locked in, a skilled tax advisor can do more than save you money this year. They can build a multi-year plan that integrates depreciation, financing, entity design, and exit strategies into one coordinated approach. For developers juggling millions in projects, that kind of planning often delivers returns far greater than the fees.

Bottom Line

The tax code rewards developers who know the rules—and penalizes those who don’t. Professional help isn’t just about filing forms; it’s about making sure every project is structured to minimize tax, protect cash flow, and keep you focused on building, not paperwork.

Disclaimer: This content is for educational purposes only and does not constitute personalized tax, legal, or financial advice. Tax laws are complex and subject to change. Individual circumstances vary, and strategies that work for one developer may not be suitable for another. Before taking action, consult with a qualified tax advisor—such as Town CPAs—who can evaluate your specific situation.