Additional Content Provided by Michael McClain, AVP, Research
On July 4, President Trump signed into law the “One Big Beautiful Bill Act (OBBBA)”, a far-reaching piece of legislation that will impact the U.S. investment landscape for years to come. While there is an incredible amount of detail in the 869-page text, as it relates to alternative investments, there are several key takeaways for investors to consider.
Carried Interest
- Carried interest is a fee many private investment managers charge in addition to the more common flat management fee. The OBBBA preserves the current favorable tax treatment as carried interest will continue to be taxed at long-term capital gain rates. However, the holding period for long-term capital gains treatment increases from three to five years for fund managers.
- Investment Implications: While this is a common topic during election season, the decision by OBBBA to maintain the tax treatment of carried interest is a significant relief for fund managers. Increasing the required holding period by two years will marginally reduce after-tax returns, however, it is not expected to have a meaningful impact on the industry.
College Endowment Taxation
- The OBBBA increases taxes on investment income derived from college endowments. Colleges with more than 3,000 students and an endowment per student ratio exceeding $500,000 would be subject to a tiered tax structure, starting at 1.4% and increasing to 8.0% for the wealthiest colleges.
- Investment Implications: This may cause a moderate shift in how universities allocate capital as they attempt to minimize the new tax burden. However, the overall impact should be limited as schools re-evaluate how to optimize their asset allocation.
Opportunity Zones
- The OBBBA permanently expands the Opportunity Zone (OZ) program, introducing recurring 10-year designations beginning in July 2026. The OZ program, originally created under the 2017 Tax Cuts and Jobs Act, is a designated area across the U.S. where investors can receive preferential tax treatment for long term development projects. The current OZ designations will expire at the end of 2026, while a new round of zones will be designated starting in 2027, with governors selecting eligible tracts every 10 years. Going forward, for investments held for at least five years, the program now qualifies for enhanced basis step-ups: a 10% standard step-up and a more significant 30% step-up for rural opportunity funds.
- Investment Implications: The permanent expansion of the OZ program should provide additional investments in economically distressed areas. Legislative stability is also expected to drive more capital into real estate development, infrastructure projects, and businesses within these designated zones, and in turn may lead to the launch of new fund opportunities for investors to participate in the program.
Real Estate
- Under current law, most non-residential real property can be depreciated over 39 years. Under OBBBA, an elective first-year 100% depreciation allowance is permitted for qualified production property under construction beginning after January 19, 2025, and before January 1, 2029.
- Investment Implications: Permanent 100% bonus depreciation allows businesses to immediately deduct the cost of qualifying property such as furniture, production equipment, or land improvements in the year assets are placed into service, with the benefit of reducing current year tax liability, overall cash savings, and improved rates of returns on new projects.
Clean Energy Infrastructure
- Many of the Biden era Inflation Reduction Act clean energy incentives are going to be phased out or eliminated. These include credits for qualified commercial clean vehicles, alternative fuel vehicle refueling properties, and energy-efficient commercial buildings.
- Investment Implications: While the underlying fundamentals of existing projects can still produce positive cash flows, losing tax incentives and having to more quickly deploy capital are expected to negatively impact total returns.
Overall, the OBBBA is expected to have a negative impact on the clean energy infrastructure space going forward, however, a more constructive impact on other areas of the alternative asset industry. Additionally, as public firms start to adjust their operations based on the legislation, it may lead to a period of attractive stock selection for fundamental managers, as companies will adapt to the OBBBA at different paces.
Jina Yoon is LPL Financial’s Chief Alternative Investment Strategist. Her investment career includes over 15 years of experience.
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