Under new IRS guidelines, certain partnerships may request 30-year depreciation recovery period for residential rental property

By Steve Brodsky  |  July 30, 2021

Under new IRS guidelines, certain partnerships may request 30-year depreciation recovery period for

The IRS recently released two revenue procedures explaining how taxpayers can change their methods of computing depreciation for certain residential rental property. Automatic consent procedures for changing accounting methods are now available for taxpayers adopting the depreciation method changes.

Background

The Tax Cuts and Jobs Act of 2017 (TCJA) limited the interest expense deductions of certain businesses. Entities that are electing real property trades or businesses (ERTBs) can opt out of this limitation, but the cost of this election is that depreciation on certain assets must be computed under the Alternative Depreciation System (ADS).

Under the TCJA, residential rental property held by an ERTB was added to the list of property to which a 30-year recovery period applies under ADS, thus changing the recovery period from 40 years to 30 years. The change applied to property placed in service after December 31, 2017.  

The Taxpayer Certainty and Disaster Tax Relief Act, enacted December 27, 2020, extended 30-year depreciation to apply to residential rental property held by certain ERTBs that was placed in service before January 1, 2018. To retroactively apply the 30-year recovery period to property placed in service at that time, ERTBs must change the computation of depreciation for the property.

Requesting the change

The first new revenue procedure providing guidance for taxpayers adopting these changes is Rev. Proc. 2021-28. It permits an ERTB that made the election on a previously filed return to change the recovery period of such property from 40 years to 30 years by either filing an automatic accounting method change or one or more amended returns.  The revenue procedure indicates that the use of 40 years instead of 30 years as the ADS recovery period of residential rental property placed in service prior to 2018 by an ERTB is an impermissible method of accounting and that generally, impermissible methods of accounting may only be corrected with an accounting method change if they are used on more than one tax return. Impermissible accounting methods used on a single return are generally corrected with an amended return.

A taxpayer changes the method of computing depreciation for such property by filing an amended return or an Administrative Adjustment Request (AAR), along with a corresponding Form 3115, according to the revenue procedure. It also allows taxpayers to use the automatic accounting method change procedures to correct this impermissible method even if it has been used on only a single tax return, and in certain cases simplified procedures, for taxpayers adopting the depreciation method changes. In addition, the revenue procedure allows amended returns to be filed for tax years prior to the immediately preceding tax year so long as the amended return or AAR is filed by April 15, 2022.  

The second new revenue procedure, Rev. Proc. 2021-29, explains how an eligible partnership, one that is now subject to the new centralized partnership audit rules, can change its recovery period for certain residential rental property using a Form 1065 with the “Amended Return” box checked along with amended K-1s, without filing an AAR. However, this option does not prevent a partnership from filing an AAR to obtain the benefits of converting to 30-year depreciation or any other tax benefits to which the partnership Is entitled. This revenue procedure further states that a partnership filing an amended return pursuant to this revenue procedure is still subject to the centralized partnership audit rules, and that Rev. Proc. 2021-29 is intended to be implemented in tandem with Rev. Proc. 2021-28 referenced above. The amended tax return must be filed on or before October 15, 2021.  

For purposes of Rev. Proc. 2021-29, an “eligible partnership” is a partnership that filed a Form 1065 for the partnership tax year beginning in 2018, 2019, or 2020 and did so prior to the issuance of the revenue procedure on June 17, 2021.

Who May Make Changes?

Partnerships that have residential rental property placed in service prior to 2018 and that have elected to be treated as ERTBs can choose to change their methods of depreciation for such property by filing an amended Form 1065, which also includes the filing of a Form 3115 with a corresponding section 481(a) adjustment.

Additionally, partnerships that choose to make a late real property trade or business election by filing an amended Form 1065 in accordance with procedures of Rev. Proc. 2020-22 (Issued April 2020) may also take advantage of the benefits of Rev. Proc. 2021-29. The late election must be filed no later than October 15, 2021.

The revenue procedure provides that a partnership must write “FILED PURSUANT TO REV PROC 2021-29” at the top of the amended return and attach a statement with each Schedule K-1 furnished to its partners with the same notation. The partnership may file electronically or by mail.

Contact your Marks Paneth advisor to discuss whether making these changes may benefit your organization.


About Steve Brodsky

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Steve D. Brodsky, CPA, JD, LL.M., is a Tax Partner in the Real Estate Group at Marks Paneth LLP. To this role, Mr. Brodsky brings 20 years of accounting experience, with a focus on advising clients on complex tax matters related to the real estate industry. Mr. Brodsky’s areas of specialization include Real Estate Investment Trust (REIT) planning and compliance, tax consulting, and filing of federal and state returns for partnerships/limited liability companies, C and... READ MORE +


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