A tax election that made sense for your last real estate project may deserve another look before your next one. For real estate businesses, opting out of the business interest deduction limit has traditionally meant giving up faster depreciation deductions on certain property. For many owners with substantial borrowing costs, securing a larger interest deduction made that trade-off worthwhile.
That balance shifted with the 2025 tax law, which restored 100% bonus depreciation and changed how the business interest deduction limit is calculated. These changes make it worth revisiting how the two benefits compare in light of your circumstances and financial goals.
Understanding the Trade-Off
Section 163(j) generally limits business interest deductions to business interest income plus 30% of adjusted taxable income (ATI), a modified measure of taxable income. Interest exceeding the limit is generally carried forward, subject to applicable rules. Eligible real estate businesses, however, have the option to elect out of this limitation. By making an election, you may bypass the Section 163(j) cap on interest attributable to that business. This may be especially appealing if borrowing costs account for a significant share of your expenses.
That choice comes with a trade-off, though. Certain property, including residential rental buildings, commercial buildings, and qualified improvement property, must use the Alternative Depreciation System (ADS) when held in a real estate business that elects out of the interest limitation. Under ADS, the cost of the property is generally deducted over a longer period of time, resulting in smaller annual depreciation deductions. Property required to use ADS is ineligible for bonus depreciation, so electing out of the limitation may reduce opportunities for immediate deductions. Certain equipment and other eligible shorter-lived assets may still qualify for bonus depreciation, so the impact depends on the property your business owns.
How the 2025 Law Changed the Equation
The 2025 tax law changed the balance between these two benefits, giving real estate businesses a reason to take a fresh look at their options. The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. This allows businesses to deduct the full eligible cost in the year the property enters service, subject to applicable requirements. For owners planning qualifying improvements, a substantial upfront deduction may help preserve cash for other investments.
The law also made the interest limitation more favorable. For tax years beginning after December 31, 2024, businesses add back depreciation, amortization, and depletion when calculating ATI. This generally increases ATI, allowing for a larger business interest deduction. As a result, some real estate businesses may be able to deduct their full interest expense without electing out of the limitation, while preserving access to bonus depreciation on qualifying property.
Which Approach is Right for You
The right approach depends on your individual circumstances. Financing costs, planned property investments, and your overall tax situation all influence the potential value of each option. Your long-term financial goals matter, too. Your CPA can help you understand how the updated rules affect your business, weigh the trade-offs, and determine which approach makes sense for you.
Evaluate How the Changes Affect Your Strategy
Changes to real estate tax rules can influence borrowing decisions, property improvements and overall investment returns. Understanding how the revised provisions apply to your circumstances can help you evaluate available options and make informed tax decisions. Contact a CPA to discuss how these changes may affect your real estate investments.
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Author
KURTIS NORDAHL
Partner, UHY LLP Managing Director, UHY Inc.
Kurtis M. Nordahl, CPA, MBA is a Managing Director at UHY Inc. with more than 14 years of experience providing tax, accounting, and business advisory services to privately held businesses, real estate investors, medical practices, nonprofit organizations, and high-net-worth individuals. He advises business owners on strategic tax planning, mergers and acquisitions, business succession, ESOP transactions, entity structuring, and financial planning to support long-term growth and profitability. Kurtis is recognized for translating complex tax and financial matters into practical business solutions while serving as a trusted advisor throughout every stage of the business lifecycle. He also plays an active leadership role within UHY by mentoring professionals, advancing advisory services, and championing innovative technologies to enhance the client experience.