NMHC/NAA are continuing efforts to seek clarification that a 30-year period depreciation period applies to certain multifamily buildings in service prior to 2018. This week, we met with Capitol Hill staff and sent a letter to new Senate Finance Committee Chairman Charles Grassley (R-Iowa) asking that lawmakers enact legislation or work with the Treasury Department to correct a drafting error in last year’s Tax Cuts and Jobs Act (TCJA) impacting the depreciation period of such property.
Under TCJA, multifamily real estate firms may elect out of limitations on interest deductibility so long as they agree to depreciate new property under the Alternative Depreciation System (ADS). At the same time, the Act required 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 existence before enactment of the law, as well as to new property. However, due to a drafting oversight, the law subjects multifamily property in existence prior to 2018 to the old 40-year period rather than the intended new 30-year period.
Firms able to abide by limits on interest deductibility will continue to depreciate multifamily property over 27.5 years.
Notably, NMHC/NAA’s industry partners joined us in a December 21, 2018, letter to Treasury Secretary Steven Mnuchin asking the Treasury Department to issue guidance specifying a 30-year depreciation period applies to property placed in service prior to 2018. Unfortunately, the IRS on the same day released a Revenue Procedure indicating that such property must be depreciated over 40 years.
Requiring 40-year depreciation of existing property would unnecessarily disrupt cash flows and increase the tax liability of multifamily firms, reducing their ability to invest in their assets or develop new properties. That result would be contrary to the goal of the tax reform bill, and it must be prevented.
For more information on this topic, please visit our Tax Depreciation Rules page.