Eligible real estate owners, developers, operators and partnerships can now withdraw previously made elections under Section 163(j)(7) and reassess whether past real property trade or business elections remain the most beneficial tax position. The IRS’s issuance of Revenue Procedure 2026-17 creates a limited process for certain taxpayers that made Section 163(j)(7) elections on a federal income tax return for taxable years beginning in 2022, 2023 or 2024. This applies to original federal income tax returns that were filed timely by the taxpayer. According to the IRS’s guidance, if the election is properly withdrawn, the taxpayer is generally treated as if the election had never been made.

This relief is particularly relevant because recent federal tax law changes have altered the cost-benefit analysis for many taxpayers. Businesses that previously elected out of the Section 163(j) business interest expense limitation may now want to revisit that decision and determine whether the depreciation benefits of withdrawing the election outweigh the potential return of the interest limitation.

BACKGROUND: SECTION 163(J) AND THE REAL PROPERTY TRADE OR BUSINESS ELECTION

Section 163(j) limits the amount of business interest expense a taxpayer may deduct each year. This rule is especially significant for real estate businesses, which often rely heavily on debt financing for acquisitions, development, construction and refinancing.

To address this limitation, qualifying real estate businesses may elect to be treated as an electing real property trade or business. By making this election, the business is generally not subject to the Section 163(j) limitation for interest expense allocable to that trade or business.

However, the election comes with a trade-off. A real property trade or business that makes the election must generally use the Alternative Depreciation System (ADS) for certain real property. This can extend the recovery period for residential rental property from 27.5 years to 30 years, nonresidential real property from 39 years to 40 years, and Qualified Improvement Property (QIP) from 15 years to 20 years. These longer recovery periods can reduce depreciation deductions in earlier tax years. In addition, property required to be depreciated under ADS is generally not eligible for bonus depreciation.

GHJ Observation: In practical terms, the election is a choice between preserving current interest deductions and accepting slower depreciation deductions over time. For many real estate taxpayers, that choice made sense when interest expense limitations were expected to be more restrictive. But the tax landscape has changed.

WHY REVENUE PROCEDURE 2026-17 MATTERS

Revenue Procedure 2026-17 gives certain taxpayers a chance to revisit a prior Section 163(j)(7) election that was generally treated as irrevocable. The guidance is tied to changes made by the One Big Beautiful Bill Act (OBBBA). For tax years beginning after Dec. 31, 2024, depreciation, amortization and depletion are again added back when calculating Adjusted Taxable Income (ATI) for Section 163(j) purposes. 

Because ATI is a key component of the business interest expense limitation, this change may increase the amount of interest expense some taxpayers can deduct without needing to rely on the real property trade or business election. The OBBBA also made 100% bonus depreciation permanent for certain qualifying property.

GHJ Observation: As a result, taxpayers that previously made the real property trade or business election should consider whether the original trade-off still produces the greater result. Withdrawing the election may allow certain taxpayers to claim more favorable depreciation deductions; at the same time, withdrawal may cause the taxpayer to once again be subject to the Section 163(j) interest expense limitation.

Because both results are possible, the decision should be based on modeling rather than assumptions.

Practical Example

Assume a real estate partnership placed significant QIP and other depreciable assets in service during 2023. At the time, the partnership was concerned that Section 163(j) would limit its ability to deduct business interest expense, so it chose to be treated as an electing real property trade or business.

By making the election, the partnership preserved its interest expense deductions, but it also had to use ADS for certain property and could not claim bonus depreciation on affected assets.

After Revenue Procedure 2026-17, the partnership revisited the decision. It compared two scenarios:

If the additional depreciation deductions exceed the amount of interest expense that becomes limited, withdrawing the election may improve the taxpayer’s overall federal tax position. If the interest limitation is more costly than the depreciation benefit, keeping the election may remain the better answer.

For partnerships, the analysis should also consider the impact on amended Schedules K-1, partner basis, capital accounts, passive activity limitations and investor communication.

HOW TO WITHDRAW THE ELECTION

To withdraw a qualifying election, taxpayers generally must file an amended federal income tax return, amended Form 1065 or an Administrative Adjustment Request (AAR) for the tax year in which the election was made. The filing must include the required statement and clearly indicate that it is “FILED PURSUANT TO REV. PROC. 2026-17.”

The filing should also reflect all related adjustments. This may include depreciation changes, basis adjustments and amended filings for later tax years affected by the withdrawal. For partnerships, amended returns and amended Schedules K-1 may be required, depending on the facts and applicable procedural rules.

Taxpayers that withdrew an election may also be able to make a late election under Section 168(k)(7) to opt out of bonus depreciation for certain affected property classes. This could be relevant when withdrawing the Section 163(j)(7) election restores bonus depreciation eligibility but the taxpayer determines that claiming bonus depreciation is not optimal for one or more classes of property.

DEADLINE CONSIDERATIONS

Timing is critical. Revenue Procedure 2026-17 generally requires the amended return, amended Form 1065 or AAR to be filed by the earlier of Oct. 15, 2026 or the end of the applicable limitations period for the taxable year.

This means taxpayers should not assume that Oct. 15, 2026 is available in every case. The applicable statute or AAR period may expire earlier, particularly for 2022 tax years. Taxpayers should confirm original filing dates, extended due dates and any applicable partnership filing rules before deciding whether relief is still available.

KEY CONSIDERATIONS FOR REAL ESTATE BUSINESSES

• Interest expense exposure. Once the election is withdrawn, the business may again be subject to the Section 163(j) limitation. Taxpayers should calculate how much interest expense may be limited or deferred
• Depreciation benefit. Taxpayers should review fixed asset records, depreciation schedules and cost segregation studies to determine whether withdrawing the election would allow more favorable depreciation deductions
• Federal and state differences. State conformity should be reviewed carefully. Some states do not fully conform to federal bonus depreciation or Section 163(j) changes, which can affect the overall benefit
• Partnership and investor impact. Partnerships may need to file amended returns, issue amended Schedules K-1 and communicate the impact to partners or investors. This can create additional administrative complexity
• Affected later years and cost segregation opportunities. Withdrawal may require amended filings not only for the original election year, but also for subsequent years affected by depreciation, basis or interest expense changes. Taxpayers should also review cost segregation studies to identify shorter-life assets, such as certain 5-year personal property, 7-year property and 15-year land improvements, that may still generate meaningful depreciation benefits even if the Section 163(j) election remains in place

NEXT STEPS

Real estate owners, developers, operators and partnerships should first identify whether they made a real property trade or business election for tax years beginning in 2022, 2023 or 2024. That review should include upper-tier and lower-tier partnerships, joint ventures and related entities.

Once affected entities are identified, taxpayers should model both scenarios: retaining the election and withdrawing it. The analysis should compare interest expense deductions, depreciation deductions, taxable income, cash flow, state tax impact and partner-level consequences.

Revenue Procedure 2026-17 offers a valuable opportunity to revisit a prior tax decision, but it is not a one-size-fits-all benefit. For some taxpayers, withdrawing the election may create additional deductions and improve cash flow. For others, maintaining the election may continue to be the better result.

Because the deadline depends on both the Oct. 15, 2026 outside date and the applicable limitations period, taxpayers should evaluate their options promptly.

Get in touch with GHJ’s Real Estate Practice to learn more about how these changes may impact your specific situation and to determine whether revisiting the 163(j) election is appropriate for your current real estate ventures.