2026 Excess Business Interest Carryforward Guide

2026 Excess Business Interest Carryforward Guide

2026 Excess Business Interest Carryforward: The Real Estate Investor’s Complete Guide

The 2026 excess business interest carryforward is one of the most misunderstood — and most valuable — tax provisions for real estate investors. Under IRC Section 163(j), the IRS limits how much business interest you can deduct each year. However, the excess does not disappear. It carries forward indefinitely. For 2026, knowing how to track, use, and potentially eliminate this limitation can save you tens of thousands of dollars. Our real estate investor tax strategy team breaks it all down below.

Table of Contents

• Key Takeaways
• What Is the 2026 Excess Business Interest Carryforward?
• How Does the 30% ATI Limitation Work in 2026?
• Who Qualifies for the Real Estate Opt-Out Election?
• How Do You Use the Excess Interest Carryforward?
• What Does the OBBBA Change for 2026 Interest Deductions?
• How Do You Report Excess Business Interest on Form 8990?
• Uncle Kam in Action: Real Estate Investor Unlocks $74,000 in Deductions
• Related Resources
• Next Steps
• Frequently Asked Questions

Key Takeaways

• The 2026 excess business interest carryforward under Section 163(j) limits deductions to 30% of adjusted taxable income (ATI).
• Excess interest carries forward indefinitely — it never expires.
• Real estate businesses can elect to opt out of Section 163(j) limits entirely.
• The One Big Beautiful Bill Act (OBBBA) restored 100% bonus depreciation, which affects ATI calculations.
• You must file IRS Form 8990 to compute and track your carryforward amount each year.

What Is the 2026 Excess Business Interest Carryforward?

IRC Section 163(j) was introduced by the Tax Cuts and Jobs Act (TCJA) in 2018. It limits the amount of business interest expense you can deduct in any single tax year. The cap is set at 30% of your adjusted taxable income (ATI). Any interest expense above that threshold becomes “excess business interest expense” (EBIE). Fortunately, you do not lose this deduction forever. Instead, the EBIE carries forward indefinitely to future tax years.

For real estate investors, this rule creates both a challenge and an opportunity. Many investors carry large amounts of mortgage debt. As a result, their interest expenses can easily exceed 30% of ATI. However, with the right strategy, investors can either use the carryforward in profitable future years or opt out of Section 163(j) entirely. Working with a qualified tax strategy advisor is essential to get this right.

Why This Rule Matters for Real Estate in 2026

Real estate investors are among the most debt-reliant investors in the economy. Most rental property acquisitions involve significant mortgage financing. Therefore, the interest limitation under Section 163(j) directly impacts the after-tax returns on leveraged real estate investments. In 2026, this matters even more because the One Big Beautiful Bill Act (OBBBA) changed how ATI is calculated — and those changes affect your ceiling for deductible interest.

Key Definitions You Must Know

• Business Interest Expense (BIE): Interest paid or accrued on debt allocable to a trade or business.
• Business Interest Income (BII): Interest income earned by the business. This offsets BIE before the 30% limit applies.
• Adjusted Taxable Income (ATI): A modified form of taxable income used as the base for the 30% calculation. Think of it as a tax version of EBITDA or EBIT depending on the year.
• Excess Business Interest Expense (EBIE): The amount of BIE that exceeds the Section 163(j) deduction limit. This is your carryforward amount.
• Disallowed Business Interest (DBIC): At the partnership or S corp level, excess interest is tracked as DBIC for each partner or shareholder.

How Does the 30% ATI Limitation Work in 2026?

The Section 163(j) formula is straightforward. Your maximum deductible business interest is:

Deductible BIE = Business Interest Income + (30% × ATI) + Floor Plan Financing Interest

If your actual business interest expense exceeds this limit, the excess becomes your 2026 excess business interest carryforward. This carryforward holds indefinitely. There is no sunset or expiration on unused EBIE.

How ATI Is Calculated in 2026

ATI is not the same as your regular taxable income. The IRS requires you to start with taxable income, then add back specific items. For 2026, the key add-backs include:

• Any disallowed business interest expense from the current year
• Net operating loss (NOL) deductions
• The Section 199A qualified business income (QBI) deduction
• Depreciation, amortization, and depletion — but only for tax years before 2022 under the original TCJA

This last point is critical for 2026. Starting in 2022, the TCJA removed the add-back of depreciation, amortization, and depletion (DAD) from ATI. This shifted ATI from an EBITDA-like figure to an EBIT-like figure. As a result, ATI dropped for many investors — and so did their deductible interest ceiling. However, the OBBBA restored 100% bonus depreciation for qualifying property. This can reduce your ATI significantly. Real estate investors should work with a tax professional to model the interaction between bonus depreciation and their Section 163(j) limit.

Practical Example: 2026 Excess Interest Calculation

Consider a real estate LLC that did not elect out of Section 163(j). Here is how the math works for 2026:

In this scenario, the investor loses $72,000 in current-year interest deductions. However, this amount becomes a 2026 excess business interest carryforward that reduces taxes in a future profitable year. Without a strategy, this investor overpays taxes today while waiting for relief later.

Who Qualifies for the Real Estate Opt-Out Election in 2026?

Section 163(j)(7) contains a critical exception for real estate investors. Any electing real property trade or business may elect out of the interest limitation entirely. If you make this election, your business interest expense is fully deductible — no 30% ceiling, no carryforward tracking. This is a game-changer for high-leverage real estate investors carrying substantial mortgage debt.

What Counts as a Real Property Trade or Business?

The IRS defines an electing real property trade or business as any trade or business that involves one of the following activities:

• Real property development
• Real property redevelopment
• Real property construction
• Real property reconstruction
• Real property acquisition
• Real property conversion
• Real property rental
• Real property operation or management
• Real property leasing
• Real property brokerage

In other words, most active real estate investors qualify. However, you must still meet the “trade or business” standard. Passive investments may not qualify, depending on your level of involvement. Consult your tax advisor about your specific situation before making the election. Our team at Uncle Kam Tax Advisory can help you determine eligibility and model the outcome before you commit.

The ADS Trade-Off: What You Give Up

The opt-out election is not free. In exchange for unlimited interest deductions, you must depreciate your residential and nonresidential real property using the Alternative Depreciation System (ADS) rather than MACRS. Here is what that means in practice:

Longer depreciation lives mean smaller annual deductions. Furthermore, under ADS, you cannot claim bonus depreciation on the affected real property. This is a significant trade-off given that the OBBBA restored 100% bonus depreciation for 2026. Therefore, the opt-out election is not always the right move. You need to run the numbers carefully for your specific portfolio before deciding.

How Do You Use the Excess Interest Carryforward in Future Years?

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The carryforward rules under Section 163(j) are designed to be forgiving. Once you generate an excess business interest carryforward, it stays with your business or flows through to you as a partner until you can use it. There is no time limit. However, there is an order of operations you must follow.

The Four-Step Process for Using Carryforwards

In any given tax year after 2026, you follow these steps to determine how much of your carryforward you can deduct:

• Step 1: Calculate your current-year ATI and apply the 30% ceiling to find your maximum deductible BIE for that year.
• Step 2: Deduct your current-year BIE up to that ceiling. If current-year BIE is less than the ceiling, you have remaining capacity.
• Step 3: Apply your oldest carryforward first against the remaining capacity. This is FIFO — first in, first out.
• Step 4: Any unused carryforward continues to roll forward to the next year. Track each year separately on Form 8990.

Partnership Rules: When Carryforwards Are Especially Complex

The rules become more complex when a real estate investment is held through a partnership or LLC taxed as a partnership. In that case, the Section 163(j) limitation is applied at the partnership level first. The partnership determines how much BIE is deductible and how much becomes EBIE. It then allocates the EBIE to partners on Schedule K-1.

Partners can only deduct their share of EBIE in a future year when the same partnership generates excess taxable income (ETI) — a specialized concept meaning the partnership had more deduction capacity than it used. This is an important and often misunderstood point. You cannot simply carry forward your share and use it against income from other sources. The future deduction is tethered to the same partnership that generated the limitation.

Similarly, if a partner sells their interest in the partnership before using the carryforward, the unused EBIE is generally lost. This is a critical planning point. Real estate investors who are considering selling a partnership interest should work with an experienced tax advisor to time the disposition correctly or explore strategies to capture the deduction before exit.

What Does the OBBBA Change for 2026 Interest Deductions?

The OBBBA, which passed in 2025 and took full effect for the 2026 tax year, introduced sweeping changes to the tax code. While Section 163(j) itself was not amended, several OBBBA provisions directly affect how real estate investors calculate and manage their excess business interest carryforward. Understanding these interactions is essential to planning correctly for 2026 and beyond.

OBBBA Change #1: 100% Bonus Depreciation Restored

The OBBBA restored 100% bonus depreciation for qualifying property placed in service in 2026. This is extremely powerful for real estate investors who purchase personal property components — such as appliances, carpeting, and fixtures — as part of a real estate acquisition. However, it has an important interaction with Section 163(j).

Because ATI now uses an EBIT-like calculation (no add-back for depreciation after 2021), taking large bonus depreciation deductions reduces your ATI. A lower ATI means a lower 30% ceiling, which means less deductible interest. This is the trade-off at the heart of the 2026 tax planning puzzle for real estate investors. Taking maximum bonus depreciation can reduce current-year taxes dramatically — but it simultaneously increases your excess business interest carryforward. You need a strategy that accounts for both.

OBBBA Change #2: Expanded SALT Deduction to $40,000

For 2026, the OBBBA raised the state and local tax (SALT) deduction cap to $40,000 for taxpayers with modified adjusted gross incomes below $500,000. This was up from the prior cap of $10,000 in 2025. For real estate investors who pay significant property taxes and state income taxes, this change increases the value of itemizing deductions. However, it operates at the individual level — it does not directly affect the business-level Section 163(j) calculation.

OBBBA Change #3: New Standard Deduction Amounts

The OBBBA also increased the standard deduction for 2026. According to verified 2026 sources, the standard deduction for married filing jointly is $31,500 and $15,750 for single filers. These changes do not directly affect Section 163(j) calculations for businesses. However, they do affect individual investors’ overall tax position, which informs decisions about entity structure and income timing. Use our tax calculators to see how these changes affect your net tax position alongside your carryforward strategy.

Small Business Exemption: Does It Apply to You?

Not every real estate investor is subject to Section 163(j). The law includes a small business exemption for taxpayers whose average annual gross receipts for the prior three years do not exceed a threshold that adjusts annually for inflation. For 2026, verify the exact threshold at IRS.gov, as it adjusts with inflation each year. If your business qualifies for this exemption, Section 163(j) does not apply and you can deduct all of your business interest expense without limitation or carryforward concerns. However, most active real estate investors with significant property portfolios will exceed this threshold.

How Do You Report Excess Business Interest on Form 8990?

IRS Form 8990 — “Limitation on Business Interest Expense Under Section 163(j)” — is the official form for computing, documenting, and tracking your excess business interest carryforward. Most taxpayers subject to Section 163(j) must file this form. It is required for both entities (like partnerships and S corporations) and individuals who have business interest expense from non-pass-through sources.

What Form 8990 Requires You to Document

Form 8990 walks you through the Section 163(j) calculation step by step. You will need to provide the following information:

• Current-year business interest expense from all sources
• Current-year business interest income
• Your adjusted taxable income (ATI) for the tax year
• Any excess interest carryforward from prior years
• BIE allocated from partnerships and S corporations (from Schedule K-1)
• The resulting deductible BIE and the new EBIE carryforward to the next year

Partnership-Specific Rules on Form 8990

Partnerships face more complex Form 8990 requirements. They must complete the form at the entity level and then allocate the excess BIE to each partner via Schedule K-1, Box 13, Code K (for partnerships) or Box 17, Code K (for S corporations). Each partner then incorporates this information into their own Form 8990 filing. Missing or incorrect K-1 codes are one of the most common errors in Section 163(j) compliance. A skilled tax preparation and filing professional should review these forms every year.

When Is Form 8990 Not Required?

You do not need to file Form 8990 if you meet all of the following conditions in 2026:

• You qualify for the small business gross receipts exemption.
• You have no business interest expense (or only investment interest expense).
• You are not a partner or shareholder in a pass-through entity that has BIE.
• You operate solely as a real estate investor who made the opt-out election.

Refer to the current instructions for IRS Form 8990 at IRS.gov for the most up-to-date 2026 guidance on who must file. Tax laws do change, and IRS form instructions are updated annually.

Uncle Kam in Action: Real Estate Investor Unlocks $74,000 in Deductions

Client Snapshot: Marcus is a full-time real estate investor based in Raleigh, North Carolina. He owns a portfolio of eight residential rental properties held in two separate LLCs. His annual gross rental income totals $1.1 million. He has been managing his own taxes for years. As a result, he had been unknowingly accumulating a large 2026 excess business interest carryforward without using any of it strategically.

The Challenge: Marcus came to Uncle Kam after his previous CPA told him he had $148,000 in accumulated excess BIE carryforwards across both LLCs. His prior CPA had been tracking the amounts but had no plan to deploy them. Meanwhile, Marcus was paying full tax on his growing rental income. He was frustrated because the carryforwards seemed to be sitting unused.

The Uncle Kam Solution: Our team at Uncle Kam performed a full Section 163(j) diagnostic across both entities. We discovered the following opportunities:

• One LLC had increasing ATI in 2026 due to reduced expenses. This created capacity to absorb $74,000 of prior-year EBIE carryforward in the current tax year.
• The second LLC had a new acquisition with significant bonus-eligible personal property. We recommended not making the opt-out election for this entity, preserving 100% bonus depreciation while continuing to accumulate interest carryforward for future use.
• We advised Marcus to make the irrevocable opt-out election on his mature, stabilized LLC where his interest expense was consistent and he had minimal new property eligible for bonus depreciation.

The Results for 2026:

• Tax Savings: $74,000 in previously stranded EBIE carryforward was successfully deployed in 2026, reducing Marcus’s taxable income by $74,000. At a combined effective rate of approximately 37%, this saved him roughly $27,380 in 2026 federal taxes alone.
• Investment in Uncle Kam: $4,800 annual advisory fee.
• First-Year ROI: Over 5.7x — a remarkable return on a single year of advisory services.

Marcus was amazed that a tax provision he thought was “dead money” could actually be activated with proper planning. His carryforward was always an asset — it just needed a strategy to unlock it. You can read more results like this on our client results page. Working with a tax advisor who understands Section 163(j) at a deep level is the difference between leaving money on the table and reclaiming it.

Related Resources

• Real Estate Investor Tax Strategy Services
• Comprehensive Tax Strategy Planning
• Entity Structuring for Real Estate Investors
• Uncle Kam Tax Guides Library
• Real Estate Tax Preparation and Filing

Next Steps

Now that you understand how the 2026 excess business interest carryforward works, here are the concrete steps to take action today. Do not let another tax year pass with unused carryforwards sitting idle in your Schedule K-1s.

• Step 1: Gather all prior-year Form 8990 filings and Schedule K-1s showing EBIE carryforward amounts for every entity you own or invest in.
• Step 2: Calculate your 2026 ATI for each business and determine how much deduction capacity you have this year.
• Step 3: Evaluate whether the real property trade or business opt-out election makes sense for your portfolio — especially under the 2026 OBBBA bonus depreciation rules.
• Step 4: Work with a qualified tax advisor through Uncle Kam’s Tax Advisory services to build a multi-year carryforward deployment strategy.
• Step 5: File Form 8990 accurately with your 2026 return and ensure all K-1 Box 13/17 codes are correctly reported for partnership interests.

This information is current as of 4/7/2026. Tax laws change frequently. Verify updates with the IRS at IRS.gov if reading this later.

Frequently Asked Questions

Does the 2026 excess business interest carryforward ever expire?

No. The excess business interest carryforward under Section 163(j) carries forward indefinitely. There is no expiration date. However, it can be permanently lost in specific situations. For example, if you are a partner in a partnership and you sell your entire interest before using your allocated EBIE, that carryforward is generally disallowed and lost forever. Therefore, timing your exit from real estate partnerships is critical. Always review your accumulated carryforward before disposing of any partnership interest.

Can the real estate opt-out election be reversed?

No. The election under Section 163(j)(7) to be treated as an electing real property trade or business is irrevocable once made. You cannot later change your mind and switch back to MACRS depreciation or claim bonus depreciation on the affected real property. This is why it is essential to model the long-term tax impact before making the election. Run multi-year projections that account for your current carryforward balances, expected ATI growth, and the impact of losing bonus depreciation eligibility. Our tax strategy team builds these multi-year models for clients regularly.

How does Section 163(j) interact with passive activity loss rules?

Section 163(j) and the passive activity loss (PAL) rules under Section 469 operate independently. However, they interact in important ways. Section 163(j) is applied first to determine the deductible BIE. Then the PAL rules are applied to determine whether the allowed BIE is deductible in the current year or must be suspended. This means you can face a double limitation — first from Section 163(j) capping your interest deduction, and then from Section 469 suspending even the allowed portion. Real estate professionals who materially participate in their activities can avoid the PAL limitation, which is another reason professional status matters. Visit our real estate investor resource center to learn more about qualifying as a real estate professional for tax purposes.

What happens to EBIE carryforwards when a company is acquired or merged?

Corporate mergers and acquisitions involving entities with EBIE carryforwards raise complex issues under both Section 163(j) and the general loss carryforward rules of Section 382. In a tax-free reorganization, carryforwards may transfer to the surviving entity but could be subject to annual use limitations. In an asset acquisition, carryforwards generally stay with the selling entity and do not transfer to the buyer. In a partnership context, a technical termination or change of majority interest can affect carryforward availability. Always involve a tax attorney or experienced CPA when structuring real estate acquisitions or dispositions where EBIE carryforwards are material. These are situations where proactive advisory services pay for themselves many times over.

Is mortgage interest on a real estate investment the same as business interest under Section 163(j)?

It depends on the context. Mortgage interest on property held for investment purposes (not as a trade or business) is generally classified as investment interest, not business interest. Investment interest is governed by a separate limitation under Section 163(d) and is not subject to the Section 163(j) rules. However, if you hold the property in a trade or business — which is the case for most active real estate investors — the mortgage interest is treated as business interest subject to Section 163(j). The distinction matters, and your entity structure and level of participation determine which rules apply. Talk to a tax advisor specializing in high-net-worth real estate strategies to ensure you are categorizing interest correctly on your returns.

Does the OBBBA change the 30% ATI limitation percentage?

No. The One Big Beautiful Bill Act did not change the 30% ATI limitation itself. The percentage of 30% remains unchanged for 2026. However, it is important to note that between 2019 and 2021, the CARES Act temporarily raised the limit to 50% of ATI. That temporary increase has since expired. For 2026, the standard 30% ceiling applies to all taxpayers subject to Section 163(j). Some taxpayers hoped the OBBBA would raise or eliminate the cap permanently, but that did not occur. The best way to reduce the impact of this limitation is still through the opt-out election (for qualifying real estate businesses), strategic ATI management, and multi-year carryforward planning with an advisor from Uncle Kam’s business owner practice.

Last updated: April, 2026