The Consolidated Appropriations Act included several new relief packages for individuals and businesses. As we dissect the current bill, YHB is producing a series of in-depth analysis on the bill to help you take advantage of the bill. In this article, we will explore a change in depreciation relating to rental property depreciation.
Under the Tax Cuts and Jobs Act (TCJA), Congress enacted IRC 163(j) that limits business interest deductions for certain businesses. One type of business that was caught up in this limitation was residential real estate due to syndicate rules.
In general, if a business has 35 percent of their losses allocated to limited partners or limited entrepreneurs, then the business is considered a syndicate. As a syndicate, the business interest limitation will apply even if they have less than $26,000,000 in average annual gross receipts. (Note: this will also cause the company to use the accrual method of accounting).
In order to be exempt from the business limitation, these businesses could elect to use ADS depreciation which depreciates the residential rental property over 40 years instead of the 27.5 years that it would normally depreciate under MACRS. TCJA changed this depreciation for any property placed in service after 1/1/18 to 30 years. Any property placed in service prior to than would still need to use the 40-year life.
The new bill changes this depreciable life to 30 years for any residential rental property placed in service prior to 1/1/18.
Any residential rental property entity that could be considered a syndicate may need to make changes to their depreciation in order to claim additional depreciation expenses. Consideration should also be given for opting out of the business interest limitation as well, if the entity previously has not.
Should you have any questions, contact a YHB advisor today!
Additional articles in this series:
- Overview of Second Round of PPP Funds
- New Rules Related to PPP Loan Forgiveness
- Major Changes to Meals Expense Deductions for Tax Years 2021 and 2022
- Employment Credit for Schedule C Businesses
- Additional Payroll Help from the New Stimulus Bill
- 2020 Tax Extenders