New Rules for Electing Residential Rental Property Owner

by | Feb 16, 2021 | Estate Planning, Real Estate, Tax

On December 27, 2020, former President Trump signed the Consolidated Appropriations Act (CAA) This bill contains tax provisions affecting many industries, including the real estate industry, and also provides for a technical amendment under the 2017 Tax Cuts and Jobs Act (TCJA) for residential rental businesses that made the Real Property Trade or Business (RPTB) election under Code Section 163(j).

Under the TCJA, interest deductions for taxpayers in the residential real estate industry can be limited and suspended if you meet certain conditions. This limit applies when you have a net loss for the year and limited partners that receive 35% or more of the loss for the current year unless the RPTB election is made.

The consequence of the election not to have interest expense limited is an increase in the 27.5-year depreciable life of the real property, thus reducing depreciation expense annually. The recovery period for the Electing Residential Property was 40 years under the TCJA if the property was acquired before January 1, 2018, and 30 years if the property was acquired after December 31, 2017. The technical amendment included in the CAA reduced the recovery period for all residential rental property to 30 years, including those acquired before January 1, 2018.

For businesses that did not elect out of the business interest expense limitation rules under Code Section 163(j) because the benefits of electing out of 163(j) with a 40-year recovery period were outweighed by the benefits of a 27.5-year recovery period, may now have to reconsider their decision. You can make this election “out” for any year, but once made it is permanent.

Further, and most importantly, we can take the additional depreciation for the prior years calculated over 40 years, without having to amend your returns, in the current year’s return, if this applies to you.

As we prepare your tax returns for 2020, we will advise you if this applies to you so
that we can take advantage of this change, which will be quite beneficial. Let us know if you have any questions.

Disclaimer: The information contained in this publication is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will Fishman, Block + Diamond, or its partners, employees, or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this website or for any consequential, special, or similar damages, even if advised of the possibility of such damages.