Can I deduct all the interest on my hotel loan?

Section 163(j)(1) sets that cap and says the 30 percent piece is never less than zero.^[1] Business interest is any interest on debt properly allocable to a trade or business, which is what a hotel mortgage is.^[1] Floor plan financing is not a hotel item: section 163(j)(9) limits it to debt financing motor vehicles, boats or farm machinery held for sale or lease and secured by that inventory.^[1]

Section 163(j)(8) defines adjusted taxable income as taxable income computed without regard to items not allocable to a trade or business, business interest and business interest income, the net operating loss and section 199A deductions, depreciation, amortization and depletion, and certain foreign inclusions.^[1] For a single-asset hotel that collapses to something an owner already knows: revenue less operating expenses. The cap is 30 percent of that number.

Section 163(j)(3) switches the limitation off for any taxpayer that meets the gross receipts test of section 448(c), other than a tax shelter barred from the cash method.^[1] Section 448(c)(1) sets that test at average annual gross receipts for the three tax years ending with the year before the current one, and section 448(c)(4) indexes the statutory $25,000,000 for inflation in $1,000,000 steps.^[3] Revenue Procedure 2025-32, section 4.30, puts that figure for tax years beginning in 2026 at $32,000,000.^[2]

Two traps sit inside that sentence. The first is aggregation: section 448(c)(2) treats all persons treated as a single employer under section 52(a) or (b) or section 414(m) or (o) as one person.^[3] One 120-key hotel will not come close. Nine under common ownership, each running $3,600,000 of revenue, add to $32,400,000 and put the group over the line.

The second is that the measure is gross receipts, not profit, reduced only by returns and allowances, so a hotel with a thin year still counts every dollar it collected.^[3] 26 CFR 1.163(j)-2(d) applies the same test to taxpayers that are neither a corporation nor a partnership, and gives the sharing rules for pass-through gross receipts.^[4] For the depreciation side of the same return, see How does depreciation work on a hotel I buy?.

Section 163(j)(3) carves out a tax shelter, section 448(d)(3) borrows the definition in section 461(i)(3), and section 461(i)(3)(B) points at any syndicate within the meaning of section 1256(e)(3)(B).^[1][3][5] That provision defines a syndicate as any partnership or other entity, other than a C corporation, if more than 35 percent of the losses of the entity during the tax year are allocable to limited partners or limited entrepreneurs.^[6]

This is the most common way a small hotel deal ends up inside the limitation. 26 CFR 1.1256(e)-2 works the fact pattern: an S corporation with $5,000,000 of gross receipts, $4,500,000 of non-interest expenses and $600,000 of interest expense has a net loss of $100,000, half of it allocated to the owner who supplied the capital and does not participate, which makes the entity a syndicate for that year.^[7] That regulation computes the loss without regard to section 163(j) itself, so the interest counts in full in testing whether there is a loss to allocate.^[4][7]

The test runs year by year on losses, so it turns on whether the entity has a loss at all. And section 1256(e)(3)(C) removes from the limited-partner count any interest held by an individual who actively participates at all times in managing the entity, by that individual's close family, or by someone who actively participated for at least five years.^[6] An owner-operator with a working partner stands differently from a deal funded by passive capital.

The first change matters most to a hotel, because hotels are depreciation-heavy. Section 163(j)(8)(A)(v) always excluded depreciation, amortization and depletion from adjusted taxable income, but between 2022 and 2024 that exclusion was switched off, so those deductions cut the cap. Public Law 119-21, section 70303(a), struck the words "in the case of taxable years beginning before January 1, 2022" from the clause, and section 70303(c)(1) applies the change to tax years beginning after December 31, 2024.^[1] The cap is now 30 percent of a number close to operating profit, with no sunset in the codified text.

The second change is newer and narrower. Section 70341 added section 163(j)(10), which applies the limitation to business interest whether the taxpayer would deduct it or capitalize it under an interest capitalization provision, applies the allowed amount first to the interest that would otherwise be capitalized, and bars any carried-forward amount from being treated as capitalizable interest later.^[1] Section 70341(b) also pulled interest capitalized under section 263(g) or 263A(f) out of the definition of business interest, all of it effective for tax years beginning after December 31, 2025.^[1] A hotel under construction is the case to watch, because construction-period interest is the interest most often charged to capital account. See How do I finance hotel construction in 2026?.

Section 163(j)(7)(A)(ii) takes an electing real property trade or business out of the definition of trade or business here, and section 163(j)(7)(B) defines that as any business described in section 469(c)(7)(C) that elects.^[1] 26 CFR 1.163(j)-1(b)(14)(i) points at the same place: section 469(c)(7)(C) and 26 CFR 1.469-9(b)(2).^[8]

Section 469(c)(7)(C) lists development, redevelopment, construction, acquisition, conversion, rental, operation, management, leasing and brokerage of real property.^[9] Whether operating a hotel counts is a real question, because 26 CFR 1.469-9(b)(2)(ii)(H) requires that payments from customers be principally for the use of the real property and not for other significant or extraordinary personal services.^[10] A hotel sells housekeeping, food and beverage and front desk service alongside the room.

The regulation answers it directly. Example 5 at 26 CFR 1.469-9(b)(2)(iii)(E) describes a limited partnership that owns and operates a luxury hotel offering in-room food and beverage, maid and linen service, valet parking, concierge, front desk and bellhop service and dry cleaning. It concludes that even though those personal services are significant, the principal purpose of the hotel's operations is providing the use of its rooms and suites, so the partnership is engaged in a real property trade or business.^[10] The same example holds that the outside contractor supplying the maid service is not, which matters when operations sit in a separate entity.^[10]

The election is open even to a hotel that already qualifies for the small business exemption, and the activity need not be a section 162 trade or business.^[11] It is made by attaching a statement titled "Section 1.163(j)-9 Election" to a timely filed original return, including extensions, naming the taxpayer and the business, the principal business activity code and the election itself.^[11]

26 CFR 1.163(j)-9(c)(2) makes the election irrevocable and (c)(1) applies it to every later year.^[11] It terminates when the taxpayer stops conducting that business, which includes selling substantially all of its assets to an unrelated buyer in a taxable asset transfer.^[11]

The depreciation consequence is statutory. Section 163(j)(13)(A) cross-references section 168(g)(1)(F), which puts property described in section 168(g)(8) on the alternative depreciation system: nonresidential real property, residential rental property and qualified improvement property held by an electing real property trade or business.^[1][12] A hotel building is nonresidential real property, which runs 39 years under section 168(c) and 40 years under the alternative system in section 168(g)(2)(C)(iv), both straight line.^[12] 26 CFR 1.163(j)-9(c)(3) adds that an electing taxpayer cannot claim the first-year bonus deduction under section 168(k) on those types.^[11]

The election does not touch most of what a cost segregation study reaches. Section 168(g)(8) names only those three categories, so furniture, fixtures, equipment and land improvements keep their shorter lives and stay eligible for bonus depreciation.^[12] On a hotel that is a large share of basis, which is why electing out costs less here than on an office building.

No lender publishes how it underwrites any of this. Whether a credit committee sizes a loan off pre-election or post-election taxable income, and what it does with a disallowed interest carryforward in a covenant test, are credit policy questions no bank, life company, debt fund or CMBS lender discloses. Ask in writing.

Section 163(j)(2) treats any disallowed business interest as business interest paid or accrued in the succeeding tax year, with no expiry, so at the entity level it is a timing cost rather than a permanent loss.^[1] Partnerships work differently. Section 163(j)(4)(A)(i) applies the limitation at the partnership level, and section 163(j)(4)(B)(i) says the partnership does not carry the disallowed amount forward. It becomes excess business interest allocated to the partners, and under section 163(j)(4)(B)(ii) a partner can deduct it later only against excess taxable income from the same partnership.^[1] Section 163(j)(4)(B)(iii) reduces the partner's basis in the partnership interest by that amount, restoring it on a later disposition for any part never deducted.^[1] A partner can therefore sit on suspended interest that only the same hotel's future income releases.

It is all computed on Form 8990, which the IRS describes as the form used to calculate the business interest expense you can deduct and the amount to carry forward.^[13] One warning: that page's "Recent developments" note still prints the $29,000,000 threshold for 2023, so take the figure from Revenue Procedure 2025-32 instead.^[2][13]

Guide

How does hotel financing work, and what does it cost right now?

Other questions in this guide

• How do I finance hotel construction in 2026?
• What is a hotel capital stack, and how do I build one?
• Can I get an interest-only hotel loan?
• How do mezzanine debt and preferred equity work on a hotel deal?
• How do I refinance a hotel loan before it matures?
• What do lenders require for a hotel loan?
• Do opportunity zones still help hotel investors?
• What are current hotel loan interest rates?

Terms defined in the glossary

• Net Operating Income (NOI)
• Debt Service Coverage Ratio (DSCR)
• Mezzanine Debt

Our own data

• Matthews Hotel Markets rate sheet
• Hotel loan sizing calculator