Is Your Real Estate Business Maximizing Interest Deductions? A Look at Section 163(j)

For many commercial real estate investors, financing is a key part of building and growing a portfolio. But with higher interest rates in recent years, business interest expense has become a larger tax deduction—and a larger planning opportunity.

That's where Internal Revenue Code Section 163(j) comes into play.

While the rules are complex, understanding how they apply can significantly impact your current tax liability, cash flow, and long-term investment strategy.

What Is Section 163(j)?

Section 163(j) limits the amount of business interest expense that can be deducted in a taxable year. In general, deductible business interest is limited to the sum of:

• Business interest income

• A percentage of adjusted taxable income (ATI)

• Floor plan financing interest (if applicable)

However, not every business is subject to these limitations. Certain small businesses and qualifying real property trades or businesses may be exempt or may elect different treatment. Recent legislative changes have also modified how adjusted taxable income is calculated for certain tax years, making it worthwhile to revisit existing tax strategies.

A Key Decision for Real Estate Owners

Many real estate businesses have the option to elect to be treated as an Electing Real Property Trade or Business (RPTOB).

Making this election generally allows a business to deduct its business interest expense without being subject to the Section 163(j) limitation. However, the election comes with an important trade-off.

An electing real property trade or business must generally depreciate certain real property using the Alternative Depreciation System (ADS), which can reduce or eliminate eligibility for bonus depreciation on those assets.

Planning Considerations

Before making—or revisiting—a Section 163(j) election, consider the following:

• How much debt does your business carry?

• Will interest expense exceed the annual limitation?

• Would bonus depreciation generate greater tax savings?

• Are you planning significant acquisitions or improvements?

• What are your long-term investment and exit strategies?

The right answer depends on your overall tax picture—not just your current year's return.

Why This Matters

Every commercial real estate portfolio is different. An election that benefits one investor may reduce tax savings for another.

With recent legislative updates affecting Section 163(j), many businesses should review prior assumptions and determine whether their current strategy still aligns with their financial goals.

Bottom Line

Section 163(j) is more than a compliance issue—it's a tax planning opportunity. Reviewing your financing structure, depreciation strategy, and projected taxable income can help you optimize deductions while supporting long-term growth.

If your business owns, develops, or invests in commercial real estate, now is an excellent time to evaluate whether your current Section 163(j) strategy is still the right fit.

IRS Resources

• IRS – Questions and Answers About the Limitation on the Deduction for Business Interest Expense

• Form 8990 – Limitation on Business Interest Expense

• Instructions for Form 8990

• Treasury Regulations under IRC Section 163(j)

Additional Resources

• CRI Advisors – Real Estate Businesses: Revisiting Section 163(j) Elections

• American Institute of CPAs (AICPA) – Tax Resources

• Journal of Accountancy – Business Interest Deduction Updates

Need Assistance?

At CRI Advisors, we help commercial real estate investors, developers, and business owners evaluate financing decisions, tax elections, depreciation strategies, and entity structures. If you'd like to review how Section 163(j) affects your business, our team can help you identify planning opportunities tailored to your investment goals.