OBBB Act Interest in Alts Part 3 ~ QBI & REITs

The 20% Qual­i­fied Busi­ness Income (QBI) deduc­tion is also known as Sec­tion 199A deduc­tion. The REIT div­i­dend tax treat­ment is a pro­vi­sion in the US tax code. 

July 24, 2025

By Al DiNi­co­la, AIF®
1031 Tax Deferred Exchange Spe­cial­ists & DST Advi­sor
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Both of these pro­vi­sions while dif­fer­ent pro­vide poten­tial­ly sig­nif­i­cant tax ben­e­fits to indi­vid­ual investors. We will pro­vide an overview of how they ben­e­fit investors, espe­cial­ly in the con­text of per­ma­nence under the OBBB Act. We are not offer­ing tax advise and each investor should seek their own advice from their CPA. In Part Two we cov­ered com­bin­ing Sec­tion 121 with Alter­na­tives for poten­tial tax strate­gies. OBBB Part Two Sec­tion 121 and Alts

We have had inquiries on how investors may acquire a REIT poten­tial­ly using a §1031 tax deferred exchange. There is no pro­vi­sion to move direct­ly from real estate own­er­ship into a REIT direct­ly through an exchange.  How­ev­er, there are strate­gies that involve mov­ing into a DST via §1031 exchange that has a poten­tial exit strat­e­gy into a REIT via a 721 UPREIT.  We have reviewed that strat­e­gy in the past and will ampli­fy in future arti­cles.

What It Is a Sec­tion 199A-20% Qual­i­fied Busi­ness Income Deduc­tion.

Not all tax­pay­ers can qual­i­fy for all deduc­tions. For eli­gi­ble tax­pay­ers the QBI deduc­tion allows to deduct up to 20% of their qual­i­fied busi­ness income from a qual­i­fied busi­ness or trade.  Eli­gi­ble­tax­pay­ers include sole pro­pri­etors, part­ners in part­ner­ships, S cor­po­ra­tion share­hold­ers, and some trusts and estates. There are sev­er­al Key Details to under­stand on how and what this applies to in adher­ence to the sec­tion. This applies to pass-through income (from part­ner­ships, LLCs, S‑corps, sole pro­pri­etor­ships). QBI excludes invest­ment income like cap­i­tal gains, div­i­dends, and inter­est. There are income thresh­olds beyond which addi­tion­al lim­i­ta­tions (W‑2 wages and depre­cia­ble prop­er­ty rules) apply.

• Sec­tion 199A was sched­uled to sun­set, mean­ing it would have expired after tax year 2025. With the pass­ing of the OBBB Act Sec­tion 199A   is now per­ma­nent.

What is the Ben­e­fit of Sec­tion 199A to Investors:

One of the first ben­e­fits may be this reduces tax­able income with­out need­ing to item­ize deduc­tions. Pro­vides a “phan­tom deduc­tion” i.e., a tax ben­e­fit with­out requir­ing a cash out­lay (depre­ci­a­tion, deple­tion, amor­ti­za­tion). Pass-through investors in real estate LLCs or syn­di­ca­tions often ben­e­fit from this, mak­ing real estate more tax effi­cient.

What is the REIT Div­i­dend Tax Ben­e­fit

REITs (Real Estate Invest­ment Trusts) are required to dis­trib­ute at least 90% of their tax­able income to share­hold­ers as div­i­dends. These div­i­dends are gen­er­al­ly taxed at ordi­nary income rates, but Sec­tion 199A also pro­vides a 20% deduc­tion on qual­i­fied REIT div­i­dends. REITs are con­sid­ered impor­tant for retire­ment investors and hous­ing devel­op­ment. With­in the past five years there has been an inclu­sion by cer­tain DST (clas­si­fied as an alter­na­tive invest­ment) spon­sors to offer an exit strat­e­gy of a 721 UPRETI. The exit strat­e­gy may be an option or manda­to­ry depend­ing on the spon­sor and spe­cif­ic offer­ings.

There are always Key Details to under­stand. This Applies to REIT div­i­dends, even though they are not QBI in the strict busi­ness income sense. There is also No income lim­i­ta­tion or wage/property test applies. The REIT div­i­dend deduc­tion is avail­able to all tax­pay­ers, not just busi­ness own­ers. Like the broad­er 199A pro­vi­sion, this ben­e­fit was also sched­uled to sun­set after 2025 but is now per­ma­nent.

What is the Ben­e­fit to Investors:

There are sev­er­al key ben­e­fits of this pro­vi­sion. This Reduces the effec­tive tax rate on REIT div­i­dends by up to 20%, mak­ing them more attrac­tive. This also encour­ages retail and insti­tu­tion­al invest­ment in REITs by enhanc­ing after-tax returns. (Anoth­er rea­son why cer­tain DST investors may wish to move into via a 721 UPREIT). Sup­ports diver­si­fied real estate port­fo­lios through pub­lic or pri­vate REIT expo­sure.

Per­ma­nence Sta­tus (As of July 4, 2025)

• The Tax Cuts and Jobs Act (TCJA) made these pro­vi­sions effec­tive start­ing in 2018, but with a planned built-in sun­set after 2025. With the pass­ing of the OBBB Act July 4, 2025, these are now per­ma­nent.

Investor Advan­tages Sum­ma­rized

Ben­e­fit	QBI Deduc­tion	REIT Div­i­dend Deduc­tion
Reduces tax­able income	Yes	Yes
Avail­able to indi­vid­ual investors	Yes	Yes
Applies to real estate income	Yes	Yes
Encour­ages pass-through invest­ment	Yes	*NO
Encour­ages REIT invest­ment	**No	Yes
Enhances cash flow and after-tax returns	Yes	Yes

*The REIT div­i­dend deduc­tion offers a tax ben­e­fit sim­i­lar to the QBI deduc­tion, but it doesn’t encour­age pass-through invest­ment, because REITs are not pass-through enti­ties and don’t involve active own­er­ship or direct par­tic­i­pa­tion in the busi­ness. REITS do receive pass-through style tax treat­ment under spe­cif­ic IRS rules.

**The QBI deduc­tion does not encour­age REIT invest­ment because REIT div­i­dends are not QBI. Con­gress pro­vid­ed a sep­a­rate 20% deduc­tion for REIT div­i­dends to offer par­al­lel ben­e­fits to pas­sive investors — but this is out­side the core QBI deduc­tion for busi­ness income.

Final Thoughts

• For real estate investors, both the QBI and REIT div­i­dend deduc­tions are key tools for tax effi­cien­cy.
• These pro­vi­sions enhance long-term plan­ning cer­tain­ty, espe­cial­ly for those rely­ing on pas­sive income from real estate or REITs.
• Alter­na­tive real estate invest­ments pro­vide for poten­tial tax strate­gies.
• We have assist­ed cash investors with direct invest­ments in REITs. These invest­ments include pub­licly trad­ed and pri­vate non-trad­ed.  For §1031 investors, access into REITS may be through 721 UPREIT once a DST is acquired and a safe har­bor peri­od.  Con­tact us for addi­tion­al details on these strate­gies.  
• We do not pro­vide tax advice and sug­gest speak­ing with your CPA.  We do inter­act with CPAs to ful­ly under­stand each investor’s suit­abil­i­ty with alter­na­tive invest­ments.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 5 Cen­ter­pointe Dri­ve, Ste. 400 Lake Oswego, OR, 97035MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.