Form 8990 and Section 163(j) in 2026: Elect Out or Stay In?

What the cap says, in the statute's words

Section 163(j)(1) says the amount allowed as a deduction for business interest “shall not exceed the sum of” three things: the business interest income of the taxpayer, “30 percent of the adjusted taxable income of such taxpayer for such taxable year”, and floor plan financing interest (26 U.S.C. 163(j)(1)). The 30% amount “shall not be less than zero.” Interest above the cap is not lost: it “shall be treated as business interest paid or accrued in the succeeding taxable year” (section 163(j)(2)). The IRS instructions put the same percentage on the form: “The applicable percentage is 30% (30% ATI limitation).”

Two points decide who this touches. First, the cap applies to business interest, so interest on a personal residence or on investment debt falls under other rules. Second, the order matters: “Section 163(j) applies after any basis limitation and before the operation of the at-risk, passive activity loss, or excess business loss limitations.” An investor in a rental fund therefore meets three filters in a row: this one, then at-risk and passive loss (see our passive loss guide), then the excess business loss cap.

What changed: depreciation is back in ATI, capitalized interest comes in

The 2025 reconciliation law touched section 163(j) in three places, and they take effect in different years.

• Depreciation add-back, tax years beginning after 2024. Section 70303(a) amended section 163(j)(8)(A)(v) by striking “in the case of taxable years beginning before January 1, 2022,”. Section 70303(c)(1) applies it to taxable years beginning after December 31, 2024. The Form 8990 instructions say the form was revised: “line 11 has been revised to reinstate the deduction allowable for depreciation, amortization, or depletion attributable to a trade or business as an adjustment to tentative taxable income for purposes of computing ATI.” For 2022 to 2024 the add-back did not exist, so ATI was smaller in those years.
• Capitalized interest, tax years beginning after 2025. Section 70341 adds a rule that the limit applies to business interest “without regard to whether the taxpayer would otherwise deduct such business interest or capitalize such business interest”, and it adds that business interest does not include interest capitalized under sections 263(g) or 263A(f). The instructions summarize it: limitations on business interest “will generally include capitalized interest except for interest capitalized under sections 263(g) and 263A(f).” For a developer, this reaches construction-period interest that used to sit outside the cap (our reading).
• Foreign inclusions, tax years beginning after 2025. Section 70342 removes amounts included under sections 951(a), 951A(a) and 78 from ATI. It matters for funds with controlled foreign corporations, not for domestic rental holders.

The depreciation change is the one that moves numbers for real estate, and a worked case shows how far.

A worked case (our arithmetic)

Take a leveraged rental fund that is a tax shelter and so cannot use the small business exemption. In one year it has $10.0 million of income before interest and depreciation, $6.0 million of depreciation (a $165 million building over 27.5 years, straight line, ignoring the first-year convention) and $5.0 million of interest, with no interest income.

Source: our arithmetic from the line structure of Form 8990 (Rev. December 2025) and the instructions; the depreciation figures use the 27.5-year and 30-year lives in 26 U.S.C. 168(c) and IRS Publication 946. Interest and income figures are invented to show the mechanics.

Two readings follow. The add-back moved $1.8 million of interest into the current year and cut taxable income from $2.8 million to $1.0 million. And the election out would deduct all $5.0 million at once but lower depreciation by $0.5 million a year, because $165 million divided by 30 is $5.5 million against $6.0 million at 27.5 years. The rule of thumb that falls out: with no interest income, interest at or under 30% of ATI is fully deductible, which is about 3.3 times ATI to interest (our arithmetic); this fund runs at 2.0 times.

Who is outside the cap: the $32 million test and the tax shelter carve-out

Section 163(j)(3) says the cap does not apply to a taxpayer “other than a tax shelter” that “meets the gross receipts test of section 448(c)”. The IRS publishes the dollar amount each year. Rev. Proc. 2025-32 section 4.30 sets it for 2026: the average annual gross receipts for the three prior taxable years must not exceed $32,000,000. The Form 8990 instructions give $31 million for tax years beginning in 2025. The instructions also warn that the amount is indexed and that the printed instructions may not be revised to show it.

A taxpayer that passes is a small business taxpayer and, with one exception, “is not required to file Form 8990 if the taxpayer is a small business taxpayer and does not have excess business interest expense from a partnership.” That covers most individuals who own a few rental houses.

The carve-out is what matters for syndications and funds. The IRS instructions say a small business taxpayer is one that is not a tax shelter, and they list what a tax shelter is: “Any enterprise other than a C corporation offering ownership via registered securities,” any syndicate within the meaning of section 1256(e)(3)(B), and any entity described in section 6662(d)(2)(C)(ii). Section 1256(e)(3)(B) defines a syndicate as a partnership or other entity (other than a corporation that is not an S corporation) “if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs.” Section 448(d)(3) defines a tax shelter by reference to section 461(i)(3). Whether a particular private fund meets one of those tests is a question for its tax preparer; we have not tested any specific offering. Gross receipts also aggregate: a partner includes a share of the partnership's receipts in proportion to its share of gross income, and members of a controlled group count as one person.

The result for a reader is a two-step question that most articles skip: is the entity small, and is it a tax shelter? If it is small and not a shelter, section 163(j) does not apply and there is nothing to elect. If it is a shelter, or above $32,000,000, the cap applies and the election out becomes a real choice.

The election out: what it costs and what it does not

A real property trade or business (rental, development, construction, management, leasing, brokerage and similar activities described in section 469(c)(7)(C)) can elect to be outside the cap. Section 163(j)(7)(B) says the election “shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be irrevocable.”

How it is made, per the instructions: attach an election statement to a “timely filed original tax return (including extensions).” The statement “must be titled “Section 1.163(j)-9 Election”” for real property or farming businesses, and it is made for each trade or business separately. A partnership's election “does not apply to a trade or business conducted by a partner outside the partnership.” For a REIT, or a partnership controlled by REITs, the instructions point to a safe harbor in Regulations section 1.163(j)-9(h).

What you give up is stated in one sentence of the instructions: “An electing real property trade or business must use the ADS for any nonresidential real property, residential rental property, and qualified improvement property used in its trade or business.” And the same instructions say that you are “not entitled to the special depreciation allowance for that property.”

Source: 26 U.S.C. 168(c) and 168(e)(3)(E) (GDS lives and the 15-year class); IRS Publication 946 (2025) (ADS lives of 30 and 40 years); Instructions for Form 8990 (Rev. December 2025). The last row is our reading of the list in the instructions.

This corrects a common shorthand, “electing out costs you bonus depreciation.” The buildings themselves never qualified for bonus because their recovery periods exceed 20 years. What the election takes is the longer life (2.5 years on a rental building, one year on a commercial one) and bonus on qualified improvement property, while bonus on separately identified equipment and land improvements stays open on the face of the instructions. That is why the cost is smaller than it sounds for a landlord, and why it is larger for an owner who renovates commercial interiors. Bonus depreciation is now 100 percent and permanent for property acquired after January 19, 2025, which is what the lost allowance is measured against (Rev. Proc. 2026-17 section 2.03). Our guides on bonus depreciation and cost segregation cover the 100% rules and the study itself.

A filer that discloses its status helps a reader see the stakes. Cantor Fitzgerald Income Trust's 10-K puts the ADS lives at “30 years for residential real property (previously 40 years), 40 years for non-residential property (no change), and 20 years for qualified improvement property (previously 40 years)”, and says that if the company is hurt by the cap, “an election could be made to permit the Company to deduct 100% of the interest expense.”

Rev. Proc. 2026-17: the withdrawal window closed on October 15, 2026

Because the election is irrevocable by the taxpayer, many real estate owners who made it for 2022 to 2024 (when depreciation was not added back) were stuck once the add-back returned. Rev. Proc. 2026-17 gave a one-time way out for elections made for taxable years beginning in 2022, 2023 or 2024. A withdrawal was done by filing an amended return, amended Form 1065 or administrative adjustment request with a statement titled “Revenue Procedure 2026-17 Section 163(j)(7) Election Withdrawal” and the legend “FILED PURSUANT TO REV. PROC. 2026-17” at the top.

The deadline is the part readers miss. The amended return “must be filed on or before the earlier of (i) October 15, 2026, or (ii) the end of the applicable period of limitations on assessment” for the year. The revenue procedure's own examples show how the second prong cuts the window short: a C corporation's calendar-year 2022 return filed March 1, 2023 had a due date of April 15, 2026. A valid withdrawal puts the taxpayer in the position of one that “will be treated as if the election had never been made,” with depreciation recomputed under section 168 and affected later years amended too. A taxpayer that also wanted a late section 168(k)(7) election (to decline bonus) needed a return for the placed-in-service year that was timely filed on or before March 18, 2026.

As of October 22, 2026 the October 15 date has passed, and we did not find an IRS extension. Anyone who missed it should ask a preparer whether the assessment period for the year is still open and whether any other relief applies; this page does not answer that.

If you hold through a K-1: where the cap shows up

A limited partner does not file the partnership's Form 8990 but can be required to file one. The instructions say that if a partnership has a limitation, “the disallowed business interest expense is not carried over by the partnership, but is allocated to the partners.” On Schedule K-1 (Form 1065), per the 2025 partner's instructions:

The trap sits in the second row of that table's logic: “A partner's excess business interest expense is treated as paid or accrued by the partner in subsequent years to the extent the partner is allocated current year excess taxable income or excess business interest income from the same partnership.” EBIE therefore does not offset your wages or other rental income; it waits for the same fund to produce excess capacity. The K-1 instructions add that the basis reduction applies “even if the partner isn't allowed a deduction for the allocated excess business interest in the year of the basis reduction,” and that unused EBIE increases basis again immediately before a sale of the interest. If the fund elects out, none of this arises, but the fund's depreciation is slower. Our K-1 guide covers the other boxes.

Form 8990 line by line (the lines that matter for real estate)

Source: Form 8990 (Rev. December 2025) and its instructions.

What 22 real estate 10-Ks filed in 2026 say about the election

We searched all Forms 10-K filed on EDGAR from January 1 to October 21, 2026 for the phrase “electing real property trade or business” and read the paragraph around each of the 22 filers it returned. Seventeen carry a nearly identical risk factor, and the table shows how each handles the three things this page is about.

Source: Forms 10-K for fiscal year 2025 on EDGAR (accession numbers in the CSV); full-text search for the phrase; the last column is our reading of each filing's own sentence that begins with adjusted taxable income.

Three findings. First, none of the 22 says it has made the election; the wording is “qualifies to elect and elects” as a general rule, or, in the case of Acadia Realty Trust, a risk that interest is disallowed “unless we elect”. Gaming and Leisure Properties goes furthest: “We have not yet elected out of the new interest expense limitation.” Second, 17 state the exemption as $25 million, which is the statutory base amount before indexing; the 2026 figure is $32,000,000, and only RREEF adds the inflation caveat. Third, three of the 17 (InPoint, Nuveen Farmland, Nuveen Global Cities) describe ATI without mentioning the depreciation add-back, which reads like the pre-2025 rule (our reading). These paragraphs read as boilerplate, not as a statement of any REIT's own tax position (our reading); the place to look for that is the tax footnote.

What a reader can do with this

• Find out whether the entity is small and whether it is a tax shelter. Ask for the gross receipts figure (K-1 box 20 code AG helps for partners) and for the fund's offering type. Most individual landlords are outside the cap.
• If you own through a fund, read box 13 code K and box 20 codes N, AE and AF. A code K amount means you must file Form 8990 and your basis has already been reduced.
• If you made the election for 2022 to 2024, check whether the Rev. Proc. 2026-17 window is still open for your year. For most calendar-year filers the date has passed; the deadline was the earlier of October 15, 2026 and the end of the assessment period.
• Before electing out for 2026, price both sides. Compare the interest you would carry forward with the lost depreciation years and, for commercial interiors, the lost bonus on qualified improvement property. The election goes on the 2026 return, so the decision can be taken with the year's numbers in hand, but it cannot be reversed by the taxpayer.
• If you build, re-run the model for 2026. Section 70341 brings capitalized interest into the cap for tax years beginning after 2025.
• Do not assume the 10-K paragraph describes the REIT's choice. None of the 22 says it elected.

FAQ

Sources, read and saved on October 22, 2026: 26 U.S.C. 163, 168, 448 and 1256 (Cornell Legal Information Institute); Public Law 119-21 (139 Stat. 72, July 4, 2025), sections 70303, 70341 and 70342; Instructions for Form 8990 (Rev. December 2025) and Form 8990 (Rev. December 2025); IRS Revenue Procedure 2025-32 (2026 inflation adjustments); IRS Revenue Procedure 2026-17; IRS Publication 946 (2025); Partner's Instructions for Schedule K-1 (Form 1065) (2025); and 22 Forms 10-K for fiscal year 2025 filed on EDGAR between February 13 and March 26, 2026. The worked case and every ratio marked as ours are our arithmetic. This is analysis of public documents, not investment, legal or tax advice.