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Ext. PublicationThe Tax Navigator – Section 163(j) Real Property Election Relief Under Rev. Proc. 2026‑17
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Join Sean Muller, The Tax Navigator, as he breaks down Rev. Proc. 2026‑17 and what it means for taxpayers who previously made the Section 163(j) real property election. The discussion explains how changes to bonus depreciation and the add‑back of depreciation and amortization affect that election, who may be eligible to revoke it and what amended returns may be required for partnerships and corporations.
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Detailed Description of The Tax Navigator – Section 163(j) Real Property Election Relief Under Rev. Proc. 2026‑17
00:00:00
Sean: The IRS released Rev. Proc. 2026-17 (Revenue Procedure 2026-17) last Wednesday or Thursday, and it deals with the real property election that taxpayers are making under Section 163(j).
00:00:11
Sean: A bit of background here, Section 163(j) allows you to deduct 30% of your eligible interest expense or eligible taxable income, applying that to interest expense. And so prior to 2022, it was basically EBITDA.
00:00:26
Sean: You took taxable income, added back your interest, added back depreciation and amortization, and they took 30% of that amount, and that was the interest expense that was allowed. For that, the interest expense limitation didn’t hit a lot of taxpayers.
00:00:40
Sean: Starting in 2022, you had to deduct depreciation and amortization. And so we had lots of Section 163(j) limitations out there. For eligible real property entities that are in the business of real estate, you can make an election to not have Section 163(j) apply.
00:00:56
Sean: The problem is, if you made that election, it was a permanent election and then you also couldn’t take bonus depreciation anymore. You had to take ADS (alternative depreciation system) depreciation, which is a slower life depreciation.
00:01:08
Sean: When OBBBA came out and re-made bonus depreciation 100% and then also allowed you to add back depreciation and amortization, lots of taxpayers wanted to undo this permanent election. We didn’t know what was going to happen there.
00:01:21
Sean: Well, Rev. Proc. 2026-17 allows you to change that election and elect out of it if you elected that in 2022, 2023 or 2024. If you elected it back in 2019, 2020 or 2021, you’re stuck. It’s permanent.
00:01:37
Sean: But if you made the election solely because of the depreciation and amortization issue, you could go back and make a retroactive election. You have to amend 2022, 2023 and 2024.
00:01:49
Sean: You can also elect bonus depreciation, because bonus depreciation, you have to elect in the year of filing. You can’t go back and reassess bonus depreciation. So you can make both those elections on an amended return.
00:02:02
Sean: If you’re a partnership, you don’t have to follow BBA (budget variance analysis) if you do not want to. You can go back and actually file an amended return, but then your taxpayers, or your partners, have to file an amended return as well.
00:02:14
Sean: A corporation is obviously much easier. You can make the election, and then, like bonus depreciation, then you have to amend your return.
00:02:19
Sean: But for partnerships, you really need to do the analysis to see if it is worth it to elect out of this provision going forward now that we have 100% bonus depreciation and the add back of depreciation and amortization, because your taxpayers or your partners will have to file amended returns in 2022, 2023 and 2024.
00:02:37
Sean: If you really look at the principle of this, taxpayers are probably making the election because they were going to have an interest expense disallowance because of bonus depreciation.
The interest they were going to free up was better for them than the depreciation deduction.
00:02:54
Sean: Sean: They probably don’t have income — in 2022, 2023 or 2024 if you elect bonus, potentially.
You just have to run the analysis and see if it’s worth it to make this election.
00:03:05
Sean: But the IRS did come out and try to help taxpayers out. So just do that analysis.
This episode of The Tax Navigator was recorded prior to publication. Some references or updates discussed may reflect information current as of the recording date.
