How Tax Reform Could Supercharge Hospitality and Real Estate – Here’s Where to Invest Now

The U.S. tax reform landscape of 2025 is poised to create seismic shifts in consumer behavior and asset valuations. Proposed changes to tip income deductions and state and local tax (SALT) deductions could unleash a wave of disposable income growth for service-sector workers and reduce fiscal pressure on high-tax state residents. For investors, this presents a rare alignment of opportunities across hospitality, real estate, and regional banking sectors—if legislative hurdles can be overcome.

The Tip Tax Break: A Shot in the Arm for Discretionary Spending

The No Tax on Tips Act (S.129/H.R.482) proposes a $25,000 annual deduction for tip income, a game-changer for millions of workers in restaurants, hotels, and beauty services. By reducing taxable income for these earners—many of whom already face reporting requirements—this reform could inject $ billions into consumer spending.

Consider this: A server earning $50,000 annually (including $20,000 in tips) would save approximately $5,000 in taxes under the new deduction. With that money now available for discretionary spending, demand for dining, travel, and leisure could surge.

Hospitality real estate investment trusts (REITs), such as Host Hotels & Resorts (HST) and Global Hyatt Corp (GOP), stand to benefit directly. These companies own prime hotels, resorts, and convention centers—assets that thrive when consumer confidence and disposable income rise.

Meanwhile, consumer discretionary firms like Las Vegas Sands (LVS) (casinos) and Darden Restaurants (DRI) (Olive Garden, etc.) could see higher foot traffic and spending. A $5,000 tax windfall for 10 million service workers translates to $50 billion in incremental demand, a tailwind for sectors reliant on discretionary spending.

SALT Deductions: A Lifeline for High-Tax State Real Estate

The SALT deduction reforms, which aim to index the $10,000 cap to inflation and introduce phase-outs for high earners, could ease a long-standing burden on homeowners in states like California, New York, and New Jersey. While the phase-outs may limit benefits for the wealthiest, middle-class households in these regions could finally deduct property and income taxes without hitting the ceiling.

This relief is critical: In California alone, the average homeowner paid $12,000 in property taxes in 2024—well above the current $10,000 cap. Removing this constraint could boost affordability, stabilize housing demand, and lift property valuations.

Regional banks with exposure to these states, such as East West Bank (EWBC) (serving California’s tech corridor) and Comerica (CMC) (Texas and Midwest), stand to gain. Strong real estate markets mean more mortgage lending, higher deposit volumes, and robust fee income from real estate transactions.

The Risks: Legislative Gridlock and Uncertainty

While the potential upside is clear, investors must remain cautious. The No Tax on Tips Act remains stalled in Congress, and the SALT reforms are still tied to broader tax reconciliation debates. Key pitfalls include:
1. Political Compromises: The $25,000 deduction could shrink to a lower threshold, or eligibility could narrow.
2. Reconciliation Rules: The Senate’s budget process may restrict the scope of reforms, sidelining tip or SALT provisions.
3. State-Level Lag: Even if federal changes pass, states like California (SB 17’s $20,000 tip deduction) may introduce conflicting rules, creating complexity.

Strategic Investment Playbook

1. Overweight Hospitality REITs:
2. Buy: Host Hotels & Resorts (HST), Global Hyatt (GOP).

3. Hold: Aimco (AIV) for apartment REIT exposure to urban markets.

4. Target Regional Banks in High-Tax States:

5. Buy: East West Bank (EWBC), Comerica (CMC).

6. Avoid: National banks with limited regional exposure (e.g., JPMorgan) may miss state-specific tailwinds.

7. Consumer Discretionary Bets:

8. Buy: Las Vegas Sands (LVS), Darden Restaurants (DRI).

9. Avoid: Overvalued leisure stocks already pricing in peak demand.

10. Monitor Legislative Triggers:

11. Track House Ways and Means Committee votes (targeted for late May) and Senate reconciliation deadlines (July 4).

Conclusion: Act Now, but Stay Nimble

The confluence of tax reforms could redefine spending and asset values, but the window for gains hinges on legislative action. Investors who position early in hospitality REITs, regional banks, and consumer discretionary leaders stand to capture outsized returns—if the reforms pass. However, keep a close watch on political drama: A single vote or compromise could shift outcomes overnight.

The time to act is now—but keep your powder dry for adjustments as the legislative storm unfolds.