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Change for Residential Rental Property Depreciation

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:

About the Author

Nicholas Preusch, CPA, JD, LLM

Nick’s expertise includes helping high wealth individual and large business entities with complex tax compliance, along with specializing in international, non-for-profit tax issues, and tax ethics issues. He has used his tax expertise not only to serve his clients, but also his peers. He has authored publications for the AICPA’s Journal of Accountancy, AICPA’s Tax Advisor, NATP’s Tax Pro Journal, and CCH’s Journal of Tax Practice and Procedure and co-authored a textbook, Tax Preparer Penalties and Circular 230 Enforcement, published by Thomas Reuters. He has also lectured nationally on topics such as ethics, complex tax transactions, and IRS practice and procedure.