New IRS Guidance May Allow Real Estate Businesses to Reclaim Bonus Depreciation Lost to Section 163(j) Elections

Key Takeaways

• IRS opens a limited window to reverse prior Section 163(j) elections. Revenue Procedure 2026-17 allows certain real estate businesses to withdraw an otherwise irrevocable election and potentially reclaim bonus depreciation.
• Recent tax law changes reduce the original benefit of the election. The OBBBA restores EBITDA-based interest limitation calculations and makes 100% bonus depreciation permanent, reducing the original benefit of the election.
• Action is time-sensitive and fact-specific. Businesses must evaluate the tradeoff between depreciation benefits and interest limitations and file amended returns by October 15, 2026, to take advantage of the relief.

The Internal Revenue Service recently issued Revenue Procedure 2026-17, allowing certain real estate businesses to withdraw a prior “electing real property trade or business” election. Such an election is normally irrevocable, and previously electing taxpayers may be able to unlock significant tax savings by taking advantage of this opportunity.

The window to act is short. Taxpayers must file the necessary amended returns by October 15, 2026, or potentially earlier depending on the taxpayer’s particular circumstances. Real estate businesses should act now to determine whether withdrawing a prior “electing real property trade or business” election could be beneficial.

What Is the Section 163(j) Real Property Trade or Business Election?

Under the Tax Cuts and Jobs Act of 2017, real estate businesses could choose “electing real property trade or business” status to escape the cap on deducting business interest expense under Section 163(j). Initially, the Section 163(j) cap was effectively calculated as a percentage of EBITDA. However, beginning in 2022, the Section 163(j) cap calculation was adjusted to remove add-backs for depreciation and amortization. This change significantly tightened the interest deduction cap for many capital-intensive real estate businesses and made the “electing real property trade or business” election more attractive.

However, this election came at a significant cost: the business was required to depreciate certain property under the slower alternative depreciation system and was prohibited from claiming bonus depreciation under Section 168(k) on that property. Importantly, the election, once made, applied to the initial year of the election and all subsequent taxable years and was irrevocable.

The One Big Beautiful Bill Act (the “OBBBA”), enacted on July 4, 2025, fundamentally changed this calculus. The OBBBA restored the ability to add back depreciation and amortization when computing the Section 163(j) limitation for tax years beginning after December 31, 2024. It also made 100% bonus depreciation permanent for qualifying property acquired after January 19, 2025. For many real estate businesses, these two changes together mean the original reason for making the election may no longer justify the cost of forgoing accelerated and bonus depreciation.

How Does Revenue Procedure 2026-17 Simplify Amendments for Partnerships?

Many real estate investments are held through partnerships, and the revenue procedure addresses the unique procedural challenges they face. Partnerships subject to the centralized audit regime under the Bipartisan Budget Act of 2015 ordinarily must file an administrative adjustment request to correct prior-year returns, which can be a burdensome and complex process. Revenue Procedure 2026-17 provides significant simplification by allowing certain eligible partnerships to, instead, file an amended Form 1065 and issue amended Schedules K-1.

What Should Real Estate Businesses Do Before the October 15 Deadline?

Taxpayers who previously made an election to be treated as an “electing real property trade or business” should evaluate whether withdrawing such election could be beneficial. This analysis is fact-specific, and interested parties should consult their tax advisors to determine whether action is advisable before the applicable deadline expires.

For more information, please contact any member of the Tax team.