Hi everyone! Has anyone run into the excess business loss limitation (Section 461(l)) when using 100% bonus depreciation for a short-term rental?
We purchased a STR in 2025, materially participated, and completed a cost segregation study, expecting to offset a significant amount of taxable income.
I recently learned that the excess business loss limitation may cap how much we can deduct in the current year, with the remainder carried forward.
I'm curious whether others have encountered this, how it affected your tax strategy. I was only in a high tax bracket this last year so carry forward feels like a waste. Would love to hear your experiences. Thanks!
Accountant · San Francisco, CA · Member since 2026 · 94 posts · 50 votes
3d
Hi Jen, you've got it right, and you're ahead of most people just for catching it before filing.
Quick confirmation on the mechanics: §461(l) caps your current-year business loss at your business income plus a threshold ($313k single / $626k MFJ for 2025). Anything above that is disallowed this year and carries forward as an NOL. The next-year catch is that NOLs can only offset up to 80% of taxable income, so it comes back to you over time instead of all at once.
So it's deferred, not lost. But your instinct about the bracket is the right one. If 2025 was your peak year and later years are lower, pushing deductions forward does cost you something real.
Two things worth checking before you file:
1. How big is the stranded piece, actually? The cap only bites on the loss above the threshold. You still get the full benefit up to it, so the "wasted" slice may be smaller than it feels.
2. You don't have to take all the bonus in 2025. You can elect out of bonus by asset class (§168(k)(7)), or use §179 selectively, and spread the cost-seg deductions into the years you can actually use them against high-bracket income. If your return isn't filed yet, that door is still open. This is the lever most people miss. Front-loading everything into one year only helps if that year can absorb it.
Also worth a look: §461(l) is figured on all your business activity combined, so a spouse's business income or other active income raises how much you can use before the cap.
One thing to keep buttoned up: the reason this loss offsets your other income at all is the STR treatment (average guest stay of 7 days or less, plus your material participation). §461(l) is really the second gate after the passive rules, so make sure that first gate is well documented.
Bottom line, have your CPA model "take the cap" versus "elect out of some bonus" before filing. Matching the deduction to the years you can use it usually beats dumping it all into one.
(CPA here. General info, not advice on your specific return.)
Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
4h
One point on opting out of bonus depreciation is that it’s a permanent election for that class so it does require careful consideration.
I would also add that there’s ways to utilize the NOLs such as Roth conversions or increasing your income so be sure to connect with a cpa before this year ends.
Real Estate Investor · Austin, TX · Member since 2017 · 97 posts · 25 votes
3d
Good breakdown from Kasing. One thing I'd add on the state side: a lot of states don't conform to 461(l), so the federal NOL carryforward you're creating may not exist for state purposes — that piece can just be lost. And some states decouple from bonus depreciation too, which changes the state-side value of the study. Worth having your CPA model federal and state separately before you file.
Real Estate Consultant · Lehigh Valley PA & New York City · Member since 2013 · 1k+ posts · 668 votes
2d
Yes, this catches a lot of STR owners the first year after a cost seg. The excess business loss limit caps how much net business loss can offset your other income in one year, and anything over the cap turns into a net operating loss carryforward.
The good news is it isn't wasted. The NOL carries forward and can offset future income, though usually only up to 80% of taxable income in a given year. So it shows up later instead of now. If your income drops, the value of that deduction drops too, which I think is what you're getting at.
I'd have your CPA run the numbers both ways before you file. Sometimes it makes sense to elect out of bonus on some asset classes, or take less of it, and spread the depreciation over years when you'll be in a higher bracket again. It's worth an hour of modeling before you lock it in on the return.
Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 904 votes
2d
Jen, you've read the rule correctly, and it's smart that you caught this before filing. For 2025, your business losses can only offset your business income plus a threshold of $313,000 if you're not filing jointly, or $626,000 if married filing jointly. Anything above that isn't lost. It rolls forward as a net operating loss, though in later years it can only be used against 80% of your taxable income, so it comes back gradually. Before you file, work out how big the stuck amount really is, since you still get the full benefit up to the cap. You also don't have to take all the bonus depreciation in one year. You can elect out of it for certain asset classes or use Section 179 selectively, which lets you line the deductions up with the years you'll be in a higher bracket, and keep in mind the cap looks at all of your business income combined, including your spouse's if you file jointly. Have your CPA run it both ways, capped versus electing out of some bonus, before the return goes in. What was your approximate total loss from the cost seg study, and do you expect your income to be lower in 2026? Your exact result depends on your facts, so please go over it with your own CPA or tax advisor.
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
9h
Jen, this is one of those situations where a large first-year depreciation deduction doesn't necessarily translate into the same amount of current-year tax savings.
For 2025, §461(l) limits the amount of excess business loss a noncorporate taxpayer can use currently to $313,000, or $626,000 for married filing jointly. The excess generally becomes an NOL carryforward rather than disappearing. IRS I'd also make sure the STR treatment is established before getting to §461(l). The at-risk and passive-activity rules are applied first, so material participation and the nature of the STR activity matter. IRS
The part I'd really model is whether taking the maximum bonus depreciation in 2025 is actually the best outcome for you. Depending on your income and other business activity, there can be a meaningful difference between taking the largest deduction possible and taking the deduction in the years when you can actually use it most efficiently.
I'd run at least a “maximum depreciation” scenario against a “spread some of the depreciation forward” scenario, then look at both the federal and state results.
The goal isn't simply to create the biggest deduction. It's to maximize the usable after-tax benefit over the life of the investment.
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