In February, we wrote about COVID-19 relief bills and their impact on the real estate industry – and now there’s an update on the 30-year switch, as well as insights on how recently introduced legislation would impact the interest expense limitations.
New IRS Guidance Offers Options
One of the outstanding items at that time was implementation of the switch from a 40-year alternative depreciation system (ADS) life to a 30-year ADS life for residential rentals owned before January 1, 2018 that took advantage of the election to be a Real Property Trade or Business (RPTB) to avoid interest expense limitations.
Back in February, we were still waiting on guidance on implementing that change in depreciable life. Now, the IRS has issued Rev. Proc. 2021-28 and Rev. Proc. 2021-29, which are designed to help taxpayers take advantage of this Consolidated Appropriations Act 2021 (CAA) provision. As expected, the IRS guidance allows taxpayers to either file an amended return for tax years 2018, 2019, and 2020, or to push the catch-up depreciation through 2020.
One additional item to note – not every state has adopted the 30-year ADS life for residential rentals owned before 2018. So while you can switch and take advantage of these provisions for federal purposes, states such as Indiana will require you to add that extra depreciation back.
Partnerships Are More Complex – But There’s a Reprieve
Keep in mind that amending partnership returns with specific partners (generally those other than individuals and C corporations) can be complicated and time-consuming due to new requirements starting in 2018. However, the IRS has given a bit of a reprieve to those partnerships who want to amend returns by using the former, less complicated forms to adopt these changes.
The catch is that the deadline to use the less complex forms is April 16, 2022. It is still possible to amend after this date, but you will need to use the new complex forms.
Further, if you didn’t make the RPTB election in 2018 or 2019 to take advantage of the 30-year life on an amended return, you may still have time to do that. The deadline for an amended return is October 15, 2021 – but unfortunately for partnerships, this will require the more complex set of forms noted above.
The End of the DA Add-Back
One final thing to note – as things currently stand, there will be a change to the interest expense limitation calculations starting in 2022: the add-back for depreciation and amortization (DA) will be removed. That means that instead of using EBITDA (earnings before interest, taxes, depreciation, and amortization) x 30% to determine the interest limit, you’ll be using EBIT x 30% (EBITDA – DA = EBIT).
But the books on that aren’t closed yet – the recently introduced Permanently Preserving America’s Investment in Manufacturing Act would change the rules to keep the DA in the calculation permanently. As always, we’re watching to see what happens and how it matters to you. Subscribe here, and we will keep you updated on important changes. You can also check out our original post on this topic.
We’re Here to Help
Have a question about the new guidance, changes to the 30-year switch, or how you can still take advantage of relief measures from COVID-19 legislation? Contact us – our tax professionals, as always, are here to help.