On March 18, 2026, the IRS and Treasury issued Revenue Procedure 2026-17(Opens a new window), providing transition guidance under Sections 163(j) and 168(k) for taxpayers that previously made an election under Section 163(j)(7) to be treated as a real property trade or business (RPTOB) for certain tax years. Specifically, Rev. Proc. 2026-17 provides taxpayers with guidance on how to withdraw RPTOB elections that were previously made for tax years beginning in 2022, 2023, or 2024. This guidance provides an important planning opportunity for taxpayers seeking to benefit from recent changes under the One Big Beautiful Bill Act (OBBB) that affect both interest and depreciation deductions.

Why this is important to taxpayers

Taxpayers that elect to be treated as a real property trade or business are not subject to the business interest limitation as generally required under Section 163(j). However, once made, the RPTOB election is irrevocable and applies to all subsequent tax years. Furthermore, the election requires that certain property be depreciated using the longer tax lives as established under the Alternative Depreciation System (ADS), which also prohibits the taxpayer from claiming bonus depreciation on such property. 

The OBBB revised the interest limitation calculation to exclude depreciation and amortization expenses for tax periods beginning after Dec. 31, 2024, thereby positioning many taxpayers to potentially benefit from increased interest expense deductions. Additionally, OBBB permanently reinstated 100% bonus depreciation on eligible property. Without transitional guidance, taxpayers that previously made the RPTOB election in 2022, 2023, or 2024 were effectively prohibited from benefiting from the OBBB’s recent changes that may result in increased interest expense deductions and the 100% bonus depreciation for eligible property acquired after Jan. 19, 2025.

Transitional guidance 

Rev. Proc. 2026-17 permits taxpayers to withdraw RPTOB elections that were made during tax years beginning in 2022, 2023, and 2024. If a withdrawal election is made, the taxpayer is treated as if the RPTOB election was never previously made. Additionally, taxpayers making the withdrawal election are also permitted to make a late election out of bonus depreciation for specific classes of property in accordance with Section 168(k)(7).

The withdrawal election must be made by filing an amended tax return (including an amended Form 1065) or administrative adjustment request (AAR) on or before the earlier of Oct. 15, 2026, or the applicable period of limitations on assessment pursuant to Section 6501 for the affected tax year. For refund claims arising as a result of the withdrawal election, the claim must be filed within the statute of limitations pursuant to Section 6511. The withdrawal election must be made by attaching a statement to the amended tax return or AAR for the affected tax year, including specific information as outlined in Rev. Proc. 2026-17. Additionally, the amended return must be indicated as being filed pursuant to Rev. Proc. 2026-17. Taxpayers making the withdrawal election who also opt to make a late election out of bonus for a specific class of property under Section 168(k)(7) must also indicate that election on the same amended return or AAR.

With respect to controlled foreign corporation (CFC) group elections, taxpayers that are designated as a U.S. person may also revoke an existing election or make a CFC group election without regard to the 60-month limitation for the first specified period of a specified group beginning after Dec. 31, 2024. Taxpayers making such an election must continue to follow the procedures as outlined in the regulations, but without regard to the 60-month limitation. However, the 60-month limitation will apply to any subsequent specified periods.

Collateral adjustments are required

Rev. Proc. 2026-17 states that if a taxpayer makes the withdrawal election, it will be treated as though the previous RPTOB election was never made. As such, the amended return or AAR must include collateral adjustments to taxable income resulting from the withdrawal of the Section 163(j)(7) RPTOB election. Accordingly, the taxpayer must adjust any item affected by the withdrawal that would impact taxable income for the affected year. For example, taxpayers making the withdrawal election are required to make adjustments to the depreciation expenditures claimed for those assets that were previously impacted by the RPTOB election. Additionally, the depreciable basis of such assets must be adjusted accordingly. 

Notably, Rev. Proc. 2026-17 also states that any succeeding tax years that are affected by the withdrawal of the RPTOB election must be amended (or AARs filed, if applicable) to make similar adjustments to taxable income. As such, taxpayers making the withdrawal election will generally be required to amend all affected succeeding tax returns from 2022 through the current period. Furthermore, any Section 481(a) adjustments previously made during the affected years must also be modified to account for the collateral adjustments if such Section 481(a) adjustment is affected by the RPTOB withdrawal.

Additionally, if a taxpayer that is making the withdrawal election is currently under IRS examination for its 2022, 2023, or 2024 taxable period, it must provide copies of any amended returns or AARs to the revenue agent no later than the date the taxpayer files the amended return or AAR for the withdrawal election.

What does CohnReznick think?

If a taxpayer made the real property trade or business election on a timely filed return (including extensions) for its 2022, 2023, or 2024 tax year, it should carefully analyze whether a withdrawal election or late election out of bonus depreciation may be advantageous. If the taxpayer chooses to file such an election in accordance with Rev. Proc. 2026-17, it must file amended returns (or AARs, if applicable) by the due dates. Additionally, taxpayers making such elections are required to make collateral adjustments to all affected tax years.

^{Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.}