Excess Business Loss Limitation – Federal and State Considerations for Real Estate Professionals

Prior to the introduction of IRC Sec 461(l) – Limitation on Excess Business Losses of Noncorporate Taxpayers, individual and trust taxpayers who qualified as real estate professionals were able to deduct their real estate business losses against other sources of income, with no limitations. When business losses exceeded total income, a net operating loss (NOL) was generated in the tax year.

IRC Sec 461(l) now limits the amount of excess business losses deductible in the tax year for individual and trust taxpayers. Deductible excess business losses for the 2025 tax year are limited to $626,000 for married couples filing jointly and $313,000 for single filers. Any disallowed excess business losses are treated as a net operating loss (NOL) and a carried forward to the following tax year. The NOL’s will be subject to an 80-percent limitation. The NOL may offset no more than 80-percent of the taxpayer’s taxable income. Any remaining NOL amount is carried forward to subsequent tax years.

The One Big Beautiful Bill Act made permanent this limitation on excess business losses. The legislation also adjusted the income threshold for inflation, which applies to taxable years after December 31, 2025. For 2026, the limitation is $512,000 for joint filers and $256,000 for single filers.

Impact on Real Estate Professionals

When a taxpayer has disallowed excess businesses losses and has bonus depreciation, the state tax impact should be evaluated. The interaction of these two can cause federal and state taxable income to differ materially. This can produce unexpected state taxable income and state tax liability, even when federal income is low or there is a federal loss. This situation is especially common for real estate professionals.

Planning Considerations

Tax projections and planning that incorporate excess business loss limitations and state modifications should identify if you are in this situation. There are tax planning decisions and strategies that can be implemented early to help mitigate or alleviate this situation.

For more information, please contact Mark Schneider, Partner and Real Estate Tax Leader, or your Anchin Relationship Partner.