How to Turn a Capped Loss Into Future Tax Savings: EBL & NOL Stacking

So, you’re a big-time executive either in high tech or the medical space. You’ve worked really hard, and now you’re making $500,000 plus, and you get massive performance bonuses each and every year.

Life is great; you drive nice cars, and your family is secure.

But your buddy Bob keeps talking about how he’s saving on taxes each and every year.

But your CPA tells you that there is a loss “cap” each year, and they will never let you do that. Here’s how you can work around that (and oh yeah, I think Bob is lying).

How to Make a Huge Paper Loss and Save It for the Future

§461(l) doesn’t kill the loss. It pushes the excess into next year as an NOL, and then §172 decides how fast you get to use it.

How Do These Mechanics Work?

As explained below, you cannot avoid the Excess Business Loss limitation. It’s just not possible.

However, if you are able to squeeze a lot of deductions into one tax year, you’ll create an excess carryforward that allows you to use MORE the following year.

Think of it like this. Say you’re able to write off a lot of depreciation deductions because a spouse was able to achieve REPS, plus you decided to invest in STRs as well, and did cost segs on those. You create $1 million in tax deductions. Fantastic!

You’re still limited by the $512,000 EBL threshold. But now the tax character of the loss changes. It is no longer in the “EBL” bucket. It now moves into the §172 bucket, or the Net Operating Loss bucket. These rules were vastly changed in 2017 as well, but the only existing limitation is the 80% of taxable income.

Meaning, after using Excess Business Loss (this is a later year, mind you), your itemized deductions, and anything else you can think of, you look at your taxable income, and now you can offset up to 80% of taxable income.

A Two-Year Example

An example to do the math.

Year 1: $1,000,000 W2, create $1,000,000 in tax deductions. You can only use up to $512,000. Now, you roll over $488,000 into the NOL bucket.

Year 2: Same scenario, $1,000,000 W2, but only create $600,000 of losses. Now, $88,000 carries over.

The difference in years is that now the taxable income is, let’s say, $488,000 (less a standard deduction of $35,000), so $433,000.

The $488,000 from Year 1 releases $346,400 of losses now. This now means you have $86,000 of taxable income after the NOL. And since you didn’t use all of the Year 1 NOL, you now get to roll it into Year 3.

Basically, the goal is to accumulate a lot of deductions in Year 1, and then you can roll them farther into the future and still place yourself into incredibly low tax brackets.

Here are some more specific mechanics on how these work overall.

How EBL Caps the Year

Back in 2017, the Tax Cuts and Jobs Act created a new provision called §461(l), Excess Business Loss.

What this provision effectively does is look at what is considered “trade or business income” and say you are now capped at $512,000.

What’s interesting about this provision is that it was made permanent by the One Big Beautiful Bill Act in 2025.

What this means is that anyone who earns wages or has large portfolio income is now taxed every single year, no matter how many business deductions you can wind up creating.

This is Congress’s intent. They do not want people creating a bunch of random business deductions to then save on all of the W-2 taxes.

Also, the point of this, and I want this to go back actually to earlier, is that Congress looked at the §461 rules and they wanted to create an additional loss limitation. Why do they want to do this?

It is because they just wanted to create a cap, effectively. There were similar farming rules, and they wanted to execute on them.

That’s why they (being Congress) enacted this and went this route. That’s one example of how to do it.

However, it is a single-year test. Meaning, after the loss has been “measured” in the §461 bucket, it moves into the NOL bucket.

How the Excess Becomes an NOL

After that, you’ve been pulled into what’s considered a net operating loss under §172.

Net operating loss has also gotten an adjustment in the Tax Cuts and Jobs Act. You still can carry it back and carry it forward.

Now it’s permanent that you can only carry forward the losses forever and ever and ever.

There is an 80% taxable income limitation, which means you can only deduct up to 80% of your income. If your income is $1 million, your taxable income is $1 million; you can only deduct up to $800,000 of a loss potentially.

Why §172 Slows It Down

The NOL rules are considered after the excess business loss, right? What this means is you can first use the excess business loss cap and then any net operating loss that you created the year prior.

There’s a chance that you are capped on your net operating losses. I have seen it happen before. It’s rather rare, but it’s possible for it to occur, and it is something that you must consider.

Basically, you create the stacking, right? It’s called EBL and NOL loss stacking.

When It Doesn’t Work

Now, what are some traps? You obviously have to materially participate in this; otherwise, it will not flip into the NOL category and will get trapped at the passive loss level.

You look at business, so you have to look at 469 passive losses first, then you look at excess business loss.

If it’s capped at excess business loss, then it pulls into a different category of the net operating loss.

Do This

Each year, you should model out how many deductions you need to roll to offset the next year’s taxable income.

It’s very crucial to do this so that you are maximizing your “chain reaction” for likely 3+ tax years. Once you’ve created it, it’s a system that just keeps producing.

We execute this constantly for clients. Whether you are just getting into real estate or have a massive portfolio already, we can help with these conversations and help you get the right tax outcome you’re looking for.

Book today!