The­ One Big Beautiful Bill Act (OBBBA) makes permanent the excess business loss (EBL) limitation under Section 461(l), starting in 2025. Understanding these rules can help real estate investors to avoid surprise tax bills in a year when they’d otherwise expect losses to cover their income.

EBL Limitation Key Points

Although 100% bonus depreciation has received the lion’s share of the coverage in the real estate sector, the change to a permanent EBL regime calls for careful analysis. Some important points to consider are as follows.

• Individual tax return loss limitations
• Limitation thresholds
• Coordination with other limitations

Individual Taxpayer Loss Limitations

The EBL limitation restricts the amount of combined business losses an individual taxpayer can use to offset nonbusiness income over a limitation threshold, such as wages, dividends, distributions from qualified plans, or capital gains.

Limitation Thresholds

The limitation threshold for 2025 is $313,000 for single filers and $626,000 for joint. Any loss over this amount is an EBL, which can’t be used to offset nonbusiness income and is then carried forward as a net operating loss (NOL).

Coordination With Other Limitations

The EBL limitation occurs last in the series of individual taxpayer loss limitations and is essentially the final hurdle to release taxable losses.

Example of EBL Limitations in Action

In 2025, a married couple who are considered real estate professionals invested in a multifamily apartment building that, through a cost segregation yielding 100% bonus depreciable assets, generated a million-dollar taxable loss on their individual return. They also sold publicly held stock for long term capital gain of $1 million.

Because of the EBL limitation, $374,000 ($1 million, minus $626,000) of the $1 million loss can’t be utilized against the capital gain on the 2025 return, and instead would be converted to an NOL for the following tax year.

Application to Real Estate Professionals

For a taxpayer who qualifies as a real estate professional under Section 469, the interaction of these provisions is complex. Prior to the EBL regime, if an individual had rental real estate losses that were considered active by virtue of qualifying as a real estate professional, those losses weren’t limited in offsetting other nonbusiness income.  

The excess business loss limitations apply after the passive activity loss limitations, and to the extent the rental real estate loss exceeds the thresholds discussed above, the excess loss cannot offset other nonbusiness income.

In the above example, the married couple expecting to offset their sale of stock with rental real estate losses would be subject to the EBL limitations and exposed to timing differences on the tax consequences of the 2025 income and loss items.

Strategic Planning Considerations

Real estate investors should consider the following planning strategies:

Managing W-2 Wage Income

The Coronavirus Aid, Relief, and Economic Security (CARES) Act clarified that performing services as an employee isn’t considered business income for the purposes of the EBL limitation. A nonpassive business loss may be limited in offsetting an individual’s W2 income to the extent it exceeds the EBL limitation.

Planning Tip

Taxpayers may consider entity structure and income source to convert wages to business income for the purposes of the EBL.

Managing Distributions From Qualified Retirement Plans

Loss allocations from 100% bonus depreciation have historically presented unique opportunities to shield income in the form of traditional to Roth individual retirement account (IRA) conversions.

Pending future guidance, distributions from qualified retirement plans (including Roth conversions) are considered nonbusiness income and aren’t included in the definition of business income.

Planning Tip

Consider executing Roth conversions in the year after the EBL when it converts to an NOL to shield the conversion from tax (subject to the 80% NOL limitations).

Timing of Nonbusiness Capital Asset Sales

Gains from the sale of publicly held stock, personal-use property, or even a primary residence is considered nonbusiness income. Taxpayers with significant business losses may find themselves with a substantial capital gain tax liability in a year when they are expecting a net overall taxable loss.

Planning Tip

Like the retirement plan distributions, consider timing the sale of non-business assets in a year after an EBL limited loss, or installment sale treatment to avoid the timing mismatch of the EBL and the income event.

Uncertainty in the EBL Regime

Real estate investors expecting to utilize losses against other income sources should proactively consider the type of income that can be offset, even if it may appear to be business related at the outset.

Uncertainty remains regarding whether cancellation of debt income, business related interest and dividends, and guaranteed payments are considered business income for the purposes of EBL. The AICPA is seeking guidance on these topics. Individuals should consult with their tax advisors to monitor the EBL landscape to the extent that treasury provides guidance going forward.

Steps for year-end planning

• Review entity structure to help optimize business versus nonbusiness classifications.
• Review timing of business and nonbusiness capital gain income before year end.
• Model out any limitations that would impact 2025 Q4 estimates due on January 15, 2026, and extension payments due on April 15, 2026.

We’re Here to Help

If you have questions on how to avoid surprise tax bills in your year-end planning, please contact your firm professional.

Additional Resources

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