Congress just locked in one of the more frustrating limitations in the tax code — and if you’re a real estate investor, it’s time to revise your playbook.

The Excess Business Loss (EBL) limitation under IRC §461(l) was originally set to expire in 2028. The One Big Beautiful Bill makes it permanent.

If you’re counting on real estate losses (like from cost segregation or depreciation) to wipe out your taxes, this rule might block you — unless you plan ahead.

What is IRC §461(l), Again?

This rule limits how much business loss from pass-throughs (like rentals, S Corps, and partnerships) you can deduct against non-business income like:

W-2 wages
Interest and dividends
Portfolio income
Capital gains not from business activity

For 2025, the cap is $305,000 for married filers ($152,500 single) — indexed for inflation.

Any “excess” loss becomes a Net Operating Loss (NOL) that rolls forward, but you can’t use it this year.

Why It Hits Real Estate the Hardest

Real estate investors often rely on depreciation and cost segregation studies to create paper losses — even when the property is cash flow positive. Under §461(l), those losses can be trapped unless:

They offset other passive income, or
You qualify as a Real Estate Professional (REP) under IRC §469(c)(7)

Planning Strategies to Beat the Rule

Here’s how to fight back — legally and strategically:

Become a Real Estate Professional

If you or your spouse qualify as an REP, your rental losses can be treated as non-passive, allowing you to use them against W-2 or portfolio income.

Basic REP test:

750 hours materially participating in real estate activities
More than half your total working hours in real estate
Must own ≥5% of the business or rental entity

Pro tip: You only need one spouse to qualify. Consider shifting roles.

Shift Toward Income-Generating Rentals

Use the passive income rules to your advantage:

Airbnb or mid-term rentals can generate substantial passive income
Offset it with cost seg or depreciation from other properties
Group rentals together in a common passive activity grouping to stack the losses and income

Use Bonus Depreciation and Cost Seg Wisely

Now that 100% bonus depreciation is back (starting in 2025), a well-timed cost segregation study can front-load deductions — but they’re only useful if they reduce taxable passive income or you’re a REP.

Strategy:

Run a timing model to match passive income years with depreciation years
Use Hedgi to track asset placement dates and ensure clean deduction eligibility

Structure Passive-Active Splits Smartly

You may want to segregate passive entities from active businesses to control where losses go. For example:

Keep rentals in passive LLCs
Use a separate S corp for active real estate development, management, or commissions

This can create natural offsets between activities — or keep losses "active" if you materially participate.

Code Reference

IRC §461(l) – Excess business loss limitation
OBBB §70511 – Makes the limitation permanent
IRC §469(c)(7) – Real estate professional exception to passive loss rules

The Bottom Line

You can’t rely on real estate losses to wipe out your taxes anymore — unless you earn passive income or qualify as a real estate pro.

But with smart structuring, cost seg timing, and portfolio-level planning, you can still use real estate to drive down your tax bill.

Let’s build a personalized passive loss strategy.
Whether you’re maximizing 2025 bonus depreciation, switching to mid-term rentals, or reworking your real estate hours — we’ll help you hit the tax code from the right angle.