January 21, 2021
Tax Alert
Author(s): Kenneth H. Silverberg, Brian Kenney
Covid-19 Relief Bill retroactively corrects a major impediment for owners who want to elect slower depreciation to avoid interest disallowance.
Many large residential real property (RRP) rental businesses have been hurt by the business interest deduction disallowance enacted in the 2017 Tax Cuts and Jobs Act (TCJA). Previously, it has been too costly for them to make the TCJA election to slow their depreciation and earn an exemption from the interest deduction limitation. The Consolidated Appropriations Act, 2021 (CAA) might enable them to file refund claims for 2018 and 2019 and avoid losing future interest deductions.
The TCJA imposed new limitations beginning in 2018 on the deduction for business interest expense for large taxpayers (those with annual gross receipts exceeding $25 million). Businesses could choose either to carry over the excess interest expense or elect, under Sec. 163(j)(7) (the election), to ignore the new limitations in exchange for depreciating their residential and nonresidential real property and their qualified improvement property under the slower Alternative Depreciation System (ADS) rules. The TCJA rule required a 40-year depreciation schedule for existing property in exchange for waiving the interest deduction limitation. Only projects placed in service after 2017 were eligible for the shorter 30-year schedule.
The depreciation price tag for making the election was too much for many RRP rental businesses, so they accepted the interest deduction limitations instead. Congress has now reduced the price and allowed businesses to reconsider, retroactively to January 1, 2018.
The CAA, which was signed by the president on December 27, 2020, changed the ADS rules, effective as of the same date it introduced the interest deduction limitation, January 1, 2018. Now, all rental RRP existing and in-service before 2018 need only change from 27 ½-year straight-line depreciation to 30-years.
This will make the election more cost-effective for RRP rental businesses that had substantial portfolios of property in service on December 31, 2017. If the election now makes sense at this reduced price, the CAA permits late elections back to 2018 so that taxpayers can claim refunds. (The Joint Committee estimated the federal budget impact of this change to be over $1.2 billion in 2021 alone; presumably, most of this amount would come from amended-return-refunds paid to RRP rental businesses.)
This is good news for large RRP rental owners. Here is what we know now:
Low-income housing tax credit (LIHTC) projects and others owned by partnerships should carefully consider:
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