The Tax Cuts and Jobs Act of 2017 fundamentally reshaped the economics of commercial real estate — and 2026 marks a pivotal year as key TCJA provisions sunset, phase out, or reach critical thresholds. For commercial tenants, the implications run from lease vs. buy decisions to TI allowance negotiation strategy, from depreciation timing to the after-tax cost of rent. Here's a comprehensive guide to what's changing and what it means for your lease.
This article provides general educational context on tax law provisions as they relate to commercial leasing decisions. Tax law is complex, frequently amended, and highly fact-specific. Always consult a qualified CPA or tax attorney before making leasing or investment decisions based on tax considerations. Pending legislation could change any of the provisions discussed here.
The Tax Cuts and Jobs Act of 2017 introduced sweeping changes to commercial real estate taxation. As we enter 2026, the CRE landscape is shaped by the interaction of permanent TCJA changes, phasing provisions, and potential Congressional action on expiring provisions.
| Provision | Original TCJA | 2026 Status |
|---|---|---|
| Corporate tax rate | 21% (reduced from 35%) | ✅ Permanent at 21% |
| Bonus depreciation | 100% through 2022 | ⚠️ 20% in 2026; 0% after 2026 |
| QIP 15-year depreciation | 15-year MACRS; bonus eligible | ✅ Permanent at 15-year life |
| Section 179 expensing | $1M limit (inflation-adjusted) | ✅ ~$1.22M in 2026 |
| SALT cap ($10K) | $10,000 cap (individuals) | ⚠️ Expires end of 2025 — watch for Congressional action |
| Pass-through deduction (§199A) | 20% deduction for QBI | ⚠️ Expires end of 2025 — pending extension |
| IRC §163(j) interest limitation | 30% of EBITDA (then EBIT) | ⚠️ Applies at 30% EBIT — more restrictive since 2022 |
| Opportunity Zones | Through 2026 (investment) | ⚠️ Final investment year 2026 |
| 1031 exchange | Real property only (eliminated for personal property) | ✅ Remains for qualifying real property |
| Individual income tax rates | Reduced rates through 2025 | ⚠️ Revert to pre-TCJA rates after 2025 unless extended |
Bonus depreciation — the ability to immediately expense a percentage of qualified property costs — has been the most impactful TCJA provision for commercial real estate tenants funding improvements. The phase-down has been accelerating:
| Tax Year | Bonus Depreciation % | Immediate Deduction on $500K Improvement | Remaining Basis (Straight-Line) |
|---|---|---|---|
| 2022 | 100% | $500,000 | $0 |
| 2023 | 80% | $400,000 | $100,000 |
| 2024 | 60% | $300,000 | $200,000 |
| 2025 | 40% | $200,000 | $300,000 |
| 2026 | 20% | $100,000 | $400,000 |
| 2027+ | 0% (absent legislation) | $0 | $500,000 |
This matters for lease negotiations in a specific way: if you fund improvements yourself (rather than receiving a TI allowance), your after-tax cost has increased substantially since 2022. This shifts the calculus in favor of negotiating for larger landlord-funded TI allowances in 2026 — push hard to get improvements funded via allowance rather than self-funding.
Section 179 of the IRC allows businesses to immediately expense up to approximately $1.22M (2026 inflation-adjusted limit) of qualifying personal property. Unlike bonus depreciation, Section 179 has no scheduled phase-down — but it has important limitations:
For commercial tenants, Section 179 can partially offset the bonus depreciation phase-down for qualifying moveable property — furniture, equipment, and certain non-structural improvements. Work with your CPA to identify which TI components qualify.
Qualified Improvement Property (QIP) — interior improvements to nonresidential buildings placed in service after the building's initial placement — has a 15-year MACRS life and qualifies for bonus depreciation. This creates a significant tax question in lease negotiations: who owns the improvements, and who gets the depreciation?
The answer depends on how the TI allowance is structured:
| TI Structure | Who Owns Improvements | Who Takes QIP Depreciation | Tax Implication |
|---|---|---|---|
| Landlord builds out (turnkey) | Landlord | Landlord | Landlord deducts; tenant gets space but no deduction |
| TI allowance — tenant builds, landlord reimburses | Landlord (generally) | Landlord | Tenant can deduct unreimbursed portion only |
| Tenant builds, NO allowance reimbursement | Tenant | Tenant (QIP deduction) | Tenant deducts; but owns improvements subject to lease |
| Above-standard improvements, tenant-funded | Tenant (above standard) | Tenant (above standard) | Tenant deducts above-standard portion |
| Trade fixtures (removable equipment) | Tenant | Tenant (Section 179) | Tenant deducts as personal property |
In a year with significant bonus depreciation (2022), tenants preferred to receive a TI allowance and self-build — capturing the depreciation deduction themselves. In 2026 with only 20% bonus depreciation available, the value of the depreciation deduction has fallen substantially. For many tenants, negotiating a turnkey landlord build-out has become more attractive again since the tax value of owning the improvements is lower. Your CPA should run the specific numbers for your situation.
The $10,000 SALT (state and local tax) deduction cap primarily affects individual taxpayers — but it has significant implications for commercial tenants who operate as pass-through entities (LLCs, S-corps, partnerships).
At least 36 states have enacted PTET elections, allowing pass-through entities to pay state income tax at the entity level rather than the individual level. This is significant for commercial tenants because:
This isn't a lease provision — it's a tax election. But the lease implications are real: businesses that optimize their PTET elections have more after-tax cash flow available for rent, TI investment, and lease obligations. Work with your CPA to evaluate PTET elections in every state where you have significant lease exposure.
Section 199A of the TCJA provides a 20% deduction for "qualified business income" (QBI) for pass-through entity owners, subject to various limitations. This deduction is scheduled to expire after 2025 unless Congress acts — which has been the subject of significant legislative debate.
If Section 199A expires without extension, pass-through business owners will see their effective tax rates increase significantly — potentially by 5–8 percentage points for high-income taxpayers. This affects lease economics in several ways:
As of early 2026, Congress has been debating extension of Section 199A, SALT cap modifications, and potentially restoring some level of bonus depreciation. Any of these changes would affect the analysis in this article. Monitor tax legislation developments and consult your CPA before making major leasing decisions based on current tax law assumptions.
Section 163(j) limits business interest expense deductions to 30% of "adjusted taxable income" (ATI). Prior to 2022, ATI was computed using EBITDA (adding back depreciation and amortization). Since 2022, ATI has been computed using EBIT (without the D&A addback), which makes the limitation significantly more restrictive for capital-intensive businesses.
Most commercial tenants don't finance their lease obligations through debt — so the direct impact of §163(j) on tenant decisions is limited. However, §163(j) significantly affects:
2026 is the final year for new investment in Qualified Opportunity Zone (QOZ) funds that can receive the full deferral benefits available under the TCJA. The QOZ program has created significant commercial real estate development in designated census tracts — with implications for commercial tenants considering space in these zones.
| Consideration | Implication for Tenants |
|---|---|
| New QOZ construction completing in 2026 | Increased supply of modern space in QOZs; potential for below-market introductory rents |
| QOZ investors needing to hit 90% asset tests | Landlords may be highly motivated to lease QOZ space quickly to meet fund compliance deadlines |
| 5-year QOZ hold requirement | QOZ landlords may prefer longer-term tenants who align with hold period |
| Post-2026 QOZ investments: fewer tax benefits | Reduced developer incentive for future QOZ projects — supply growth may slow after 2026 |
| QOZ buildings often in emerging neighborhoods | Location risk vs. lower rent trade-off; evaluate carefully for your business |
QOZ landlords completing new development in 2026 face significant pressure to achieve occupancy to meet fund compliance requirements. If you're evaluating a QOZ-designated building, your timing leverage is high. Negotiate aggressively for TI allowances, free rent, and favorable lease terms — the landlord's fund economics may make concessions more accessible than in non-QOZ buildings.
The 1031 like-kind exchange rules were narrowed by the TCJA to apply only to real property (personal property exchanges were eliminated), but real property 1031 exchanges remain fully available. This affects commercial tenants primarily in three scenarios:
If you currently own your business premises and are considering selling (perhaps in a sale-leaseback transaction), 1031 exchange rules allow you to defer capital gains taxes by reinvesting proceeds in replacement real property. The new "replacement property" could be commercial space you purchase to continue operating in — though a sale-leaseback inherently involves a lease rather than ownership of the replacement property.
If your landlord is selling your building as part of a 1031 exchange, they may require you to cooperate with the exchange by signing a Recognition of 1031 Exchange agreement. This is typically benign for tenants but worth reviewing carefully to confirm it doesn't create any new obligations for you.
If you're considering purchasing commercial real estate now and may want to sell and relocate in the future, factoring in 1031 exchange availability can significantly improve the long-term economics of ownership versus leasing.
While not a tax provision, the FASB ASC 842 lease accounting standard — which requires commercial tenants to capitalize operating leases on their balance sheets — continues to affect how leases are structured and negotiated. As of 2026, ASC 842 has been in effect for most public companies for several years, but many private companies adopted late or are still adjusting their processes.
| Lease Feature | ASC 842 Impact | Negotiation Implication |
|---|---|---|
| Long lease term | Larger right-of-use asset and liability on balance sheet | Shorter terms or early termination rights may improve balance sheet optics |
| Renewal options | If "reasonably certain" to exercise, options increase ROU asset | Consider whether renewal options help or hurt your balance sheet presentation |
| Variable rent (CPI, sales-based) | Not included in ROU asset calculation | Converting fixed escalations to variable may reduce balance sheet impact |
| Leases under 12 months | Exempt from capitalization (short-term lease exemption) | Short-term renewals of 11–12 months avoid balance sheet capitalization |
| Free rent periods | Levelized into ROU calculation | Front-loaded free rent doesn't reduce balance sheet impact as much as it reduces cash spend |
The Inflation Reduction Act (IRA) of 2022 created and expanded significant tax credits for energy-efficient improvements — some of which interact with commercial leases:
The IRA expanded Section 179D to increase the maximum deduction for energy-efficient commercial building improvements to $5.00/sq ft (from $1.80/sq ft under prior law). For commercial tenants:
Modern "green leases" increasingly include provisions that allocate energy cost savings and tax credits between landlord and tenant. When negotiating sustainability provisions, consider:
LeaseAI extracts every financial provision in your commercial lease — rent escalations, CAM obligations, TI structures, expense allocations, and more — in under 30 seconds. Know your full financial exposure before you commit.
Analyze My Lease →Federal tax law gets most of the attention, but state and local taxes frequently have a greater direct impact on commercial lease economics — especially for multi-location tenants:
Many municipalities offer Payment in Lieu of Taxes (PILOT) agreements for qualifying developments, which can substantially reduce a commercial tenant's NNN property tax obligations. Key considerations:
Florida is the most notable state that imposes sales tax on commercial rent — currently at a reduced rate of 2% (down from 5.5% pre-2023) with further reductions pending. If you operate in Florida:
Bonus depreciation is 20% in 2026 (down from 100% in 2022), meaning tenants who self-fund improvements get a much smaller immediate tax deduction. This makes negotiating for landlord-funded TI allowances more valuable in 2026 than in prior years. The after-tax cost of self-funded improvements has risen significantly.
QIP is interior improvements to nonresidential buildings with a 15-year depreciation life, eligible for bonus depreciation. The key question is who owns the improvements — landlord or tenant — which determines who takes the depreciation deduction. Turnkey build-outs (landlord-owned) mean the landlord takes the deduction; tenant-funded improvements mean the tenant can deduct them.
Yes, for pass-through entity owners. The $10,000 SALT cap limits individual deductibility, but PTET elections in 36+ states allow the entity to pay and deduct state taxes at the entity level, bypassing the cap. This can save high-income tenants in high-tax states (CA, NY, NJ) tens of thousands annually.
QOZ landlords completing new development in 2026 face compliance pressure to achieve occupancy. Tenants evaluating QOZ space in 2026 have strong negotiating leverage for TI allowances and rent concessions. After 2026, new QOZ incentives phase down and future development in these areas may slow.
With bonus depreciation at only 20%, the comparative tax advantage of owning vs. leasing has narrowed substantially since 2022. IRC §163(j) interest limitations add further complexity to heavily financed purchases. For businesses with uncertain EBIT, leasing avoids §163(j) exposure while preserving capital for core operations.
Key areas: 20% bonus depreciation for TI costs; Section 179 expensing (~$1.22M limit); PTET elections in each state; Section 199A pass-through deduction status; §163(j) interest limitations if evaluating purchase; QOZ opportunity timing; PILOT expiration risk in NNN leases; and any pending federal legislation that could affect these provisions.
The through-line of all the 2026 tax developments for commercial tenants is this: as bonus depreciation phases to near zero, the after-tax value of owning your own improvements has fallen dramatically. This means:
For more on commercial lease financial provisions, see our guides on Commercial Lease Cash Flow Analysis, Tax Abatement & PILOT Agreements, and Commercial Lease vs. Buy Analysis.