Last month, the IRS made a seemingly modest change that could translate into a significant tax advantage for many real estate businesses. Revenue Procedure 2026-17 allows certain taxpayers to amend prior returns and claim bonus depreciation that was previously unavailable to them.

There is, however, a narrow window to act. An amended return or an administrative adjustment request (AAR) must be filed by the earlier of October 15, 2026, or the expiration of the statute of limitations for the election year, making a prompt review of prior tax filings essential.

To understand why this matters, it helps to take a step back

What did Revenue Procedure 2026-17 do?

Revenue Procedure 2026‑17 permits qualifying real estate businesses to withdraw a prior election under Internal Revenue Code Section 163(j) to be treated as an electing real property trade or business.

This election originally allowed taxpayers to avoid the Section 163(j) business interest limitation. In exchange, however, they were required to give up faster depreciation and bonus depreciation on certain property. Rev. Proc. 2026‑17 gives taxpayers an opportunity to revisit that trade‑off in light of recent legislative changes.

This has meaningful consequences, so let’s walk through the framework step by step.

We’ll address the following questions:

1. What is the Section 163(j) limitation?
2. Why is Section 163(j) especially impactful for real estate businesses?
3. What is the real property trade or business election under Section 163(j)?
4. What changed that makes withdrawal of the election attractive now?
5. How can taxpayers withdraw their Section 163(j) elections?
6. Should real estate businesses withdraw their elections?
   

What is the Section 163(j) limitation?

Section 163(j) limits the amount of business interest expense a taxpayer may deduct in a given year. While the rule existed before 2017, it was significantly expanded by the Tax Cuts and Jobs Act (TCJA), bringing many more taxpayers within its scope.

Today, business interest deductions are generally limited to approximately 30% of adjusted taxable income (ATI).

Initially, ATI for this purpose resembled EBITDA, earnings before interest, taxes, depreciation, and amortization. Beginning in 2022, however, the calculation shifted toward an EBIT‑style approach, excluding depreciation and amortization addbacks. For capital‑intensive businesses, this change significantly reduced allowable interest deductions.

Why is Section 163(j) especially impactful for real estate businesses?

Section 163(j) has an impact on real estate operations for two primary reasons:

• High leverage: Real estate businesses typically rely heavily on debt financing, resulting in substantial interest expense.
• Large depreciation deductions: Real estate businesses typically have significant depreciation deductions. When the ATI calculation switched from EBITDA to EBIT, real estate businesses could no longer add depreciation expenses back to earnings to calculate into ATI. As a result, ATI (and their interest deductions) dropped precipitously.

Recognizing this imbalance, Congress included a special carve‑out for real estate when drafting Section 163(j).

What is the real property trade or business election under Section 163(j)?

To mitigate the harsh effects of Section 163(j), qualifying real estate businesses may elect to be treated as a real property trade or business, thereby opting out of the interest limitation entirely. The election is irrevocable and applies to all future years.

The definition of a real property trade or business is broad and includes activities such as:

• Real estate development, construction, and redevelopment
• Rental real estate operations
• Brokerage and property management services

However, the election comes at a cost. Taxpayers that make it must depreciate certain property(nonresidential real property, residential rental property, and qualified improvement property (QIP)),using the Alternative Depreciation System (ADS) instead of the General Depreciation System (GDS).

Key consequences include:

• Longer recovery periods (40 years instead of 39 for nonresidential property; 30 years instead of 27.5 for residential rental property)
• Loss of bonus depreciation eligibility for QIP, since ADS treats QIP as 20‑year property rather than 15‑year property

Many businesses concluded that fully deductible interest expense was worth the slower depreciation. For years, that was a rational decision.

What changed that makes withdrawal of the election attractive now?

In July 2025, Congress passed the One Big Beautiful Bill Act (OBBBA), which materially altered the analysis in two important ways:

1. 100% bonus depreciation was restored and made permanent, effective for property placed in service beginning in 2025.
2. The EBITDA‑based ATI calculation returned, also effective beginning in 2025.

Together, these changes significantly reduce the value of the Section 163(j) election.

First, the opportunity cost of being forced into ADS is now much higher. With full bonus depreciation back on the table, taxpayers who elected out of Section 163(j) may be sacrificing substantial current‑year deductions.

Second, because depreciation is once again added back in calculating ATI, the Section 163(j) limitation is far less restrictive for real estate businesses than it was from 2022 through 2024.

How can taxpayers withdraw their Section 163(j) elections?

Revenue Procedure 2026‑17 provides a path forward. It does two key things:

• Allows withdrawal of Section 163(j) elections made in tax years 2022, 2023, or 2024.

• Provides flexibility to elect out of bonus depreciation. Typically, taxpayers can only opt out of bonus depreciation on a timely-filed return. But Rev Proc 2026-17 provides an exception. Taxpayers who withdraw their Section 163(j) elections can choose whether they want to take bonus depreciation during those tax years. While many real estate businesses will choose to take bonus depreciation to lower their tax liabilities, some might choose not to. Rev Proc 2026-17 gives them the choice.

To withdraw the election, the taxpayer must file an amended federal income tax return or an administrative adjustment request (AAR) for the year the election was originally made. The filing must:

• Be clearly marked “FILED PURSUANT TO REV. PROC. 2026‑17”
• Include a statement confirming the withdrawal of the election
• Reflect all resulting changes, including depreciation adjustments, basis changes, and any required Section 481(a) adjustments
• Amend returns, or file an AAR for any affected subsequent years

Again, timing is critical: An amended return or an administrative adjustment request (AAR) must be filed by the earlier of October 15, 2026, or the expiration of the statute of limitations for the election year.

Should real estate businesses withdraw their elections?

For real estate businesses that made the election in 2022, 2023, and/or 2024, now is the time to revisit that decision.

The permanent return of EBITDA‑based ATI and 100% bonus depreciation makes Section 163(j) far less punitive than before. That said, withdrawing the election is not automatically the right answer for every taxpayer. The analysis should consider:

• The impact on prior‑year tax liabilities
• Ongoing interest limitation exposure
• Long‑term depreciation and
• cash‑flow implications

With a limited window to act, a careful, forward‑looking analysis is essential to determine whether withdrawing the election produces the most favorable results, both retroactively and prospectively. Contact us today for more information.