The Treasury Department and Internal Revenue Service (IRS) on June 17 issued guidance regarding legislation enacted last December clarifying that taxpayers electing out of limits on interest deductibility may depreciate multifamily buildings placed in service before 2018 over 30 years. The guidance, which NMHC and other real estate organizations requested in March, explains how taxpayers may apply the change for which NMHC had strongly advocated.
The Tax Cuts and Jobs Act (TCJA) limits the ability of taxpayers in general to deduct business interest but allows multifamily real estate firms to continue to deduct said interest as long as they agree to depreciate their property under longer periods provided for under the Alternative Depreciation System (ADS).
As originally written, the TCJA not only mandated ADS depreciation for firms electing out of interest deductibility limits, it also reduced the ADS recovery period for multifamily property from 40 years to 30 years. Congressional intent was to apply this 30-year period to buildings in service before the law was enacted as well as new properties delivered after the law went into effect.
Unfortunately, due to a drafting oversight, properties placed in service before 2018 were subject to the old 40-year period rather than the intended new 30-year period. Legislation enacted in December 2020 applies the 30-year ADS schedule for all multifamily buildings. (Firms that choose to abide by the limits on interest deductibility or that qualify for the small business exemption will continue to depreciate multifamily property over 27.5 years.)
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