Faster Depreciation, Please!
There was an important clarification made in the Consolidated Appropriations Act, 2021 with respect to the Alternative Depreciation System (ADS) recovery period of residential real property held by an electing real property trade or business.
Under the Tax Cuts and Jobs Act of 2017, a taxpayer could elect out of the Sec 163(j) business interest limitation by electing to be treated as a real property trade or business. The trade-off was that the taxpayer would be required to use the ADS recovery period of 40 years for residential real property placed in service prior to January 1, 2018 and 30 years for residential real property placed in service after that date (as compared to the Modified Accelerated Cost Recovery System recovery period of 27.5 years). This election is irrevocable and required careful analysis.
The recent clarification presents a unique opportunity for those that elected out when the recovery period was 40 years. Methinks a 30-year recovery period for residential real property might be too good to pass up!
While specific guidance from the IRS on how to incorporate the change is still pending, it is presumed that an IRS Form 3115, Application for Change in Accounting Method, and Section 481(a) adjustment would do the trick.
Sources: IRS.gov; Bloomberg Tax; RIA Checkpoint
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
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