The latest round of stimulus legislation provides a depreciation benefit to taxpayers that own and operate residential rental properties. When coupled with recent IRS guidance (Rev. Proc. 2021-9), it may also offer a significant opportunity for taxpayers managing or operating qualified residential living facilities.
The Tax Cuts and Jobs Act (TCJA) decreased the depreciable life of residential rental property under the alternative depreciation system (ADS) from 40 years to 30 years for assets placed in service after Dec. 31, 2017. This was a favorable change for any taxpayer required to use ADS in computing depreciation, including real property trades or businesses (RPTB) making the Section 163(j)(7)(B) election to opt out of the limit on interest deductions.
Congress has again modified the ADS life of residential rental property in the stimulus bill enacted in December. The bill provides that taxpayers that have made the RPTB election will generally have a 30-year recovery period for residential real property placed in service before Jan. 1, 2018, instead of the 40-year recovery period previously in effect. The change is effective retroactively, as if it had been included in the TCJA originally.
The IRS has also issued Rev. Proc. 2021-9 providing a safe harbor that allows trades or businesses that manage or operate a qualified residential living facility to be treated as a real property trade or business solely for purposes of qualifying to make the Section 163(j)(7)(B) election. The guidance defines “qualified residential living facility” to include facilities that qualify as residential rental property under Section 168(e)(2)(A) and facilities with an average customer use of at least 30 days. The guidance would cover nursing homes and similar long-term care facilities.
These recent developments may provide an opportunity for taxpayers managing or operating qualified residential living facilities and other residential rental properties by expanding the opportunity to make the RPTB election and allowing taxpayers to reduce the ADS life of certain residential rental properties placed in service before Jan. 1, 2018, to 30 years. The change in life of property can be made through the existing automatic method change procedures, but forthcoming IRS guidance may provide additional, alternate procedures.
Partner, Tax Services Leader, Real Estate & Construction
Lorie is a partner in the Philadelphia office and is the national real estate leader in tax for Grant Thornton.
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Mary is a Tax Principal in Grant Thornton's Not-For-Profit and Healthcare Practice and is solely dedicated to tax-exempt clients. As a tax attorney, Mary is responsible for research in the legal and business consequences of tax planning strategies, tax controversy, applications for exemption, and private letter ruling requests for not-for-profit organizations.
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