The Treasury Department and Internal Revenue Service (IRS) on November 26 proposed regulations implementing limits on interest deductibility enacted last December as part of the Tax Cuts and Jobs Act. Multifamily firms will generally be allowed to elect to opt out of limits on deducting business interest. The consequence of electing out of limitations on interest deductibility will be that multifamily firms will have to depreciate property over a longer period of time.
While firms were previously able to depreciate multifamily real estate over 27.5 years, property placed in service after 2017 must be depreciated over 30 years. Due to a drafting error in the statute, property placed in service prior to 2018 must be depreciated over 40 years. Firms willing to abide by limits on interest deductibility will be allowed to continue to depreciate their multifamily real estate over 27.5 years.
NMHC/NAA asked the Treasury Department and IRS to correct this drafting error as part of the proposed regulations. Unfortunately, Treasury’s proposed regulation did not address this issue. We will submit comments on the proposed regulation asking Treasury and IRS to correct this issue as part of final regulations. In addition, we will continue to ask Congress to address this issue as part of technical corrections legislations that may be considered this December or early 2019.
Should a multifamily firm wish to abide by limits on interest deductibility, a firm’s interest deduction will be limited to 30 percent of a taxpayer’s adjusted taxable income. Adjusted taxable income is defined as a taxpayer’s income without regard to interest expense, interest income, net operating loss deductions and the 20 percent deduction for qualified business income. Items of income, gain, deduction or loss – not allocable to a taxpayer – are excluded. Deductions for depreciation are also excluded prior to taxable years beginning before 2022. Business interest expense that cannot be used in one year may be carried forward to a subsequent year.
Notably, firms with under $25 million in gross receipts are exempted. Taxpayers investing in multiple partnerships should be aware that the tax code’s aggregation rules will apply to determine whether entities should be aggregated for purposes of calculating the $25 million threshold.
The proposed regulations provide that taxpayers electing out of interest deductibility limits are required to attach an election statement to their tax return. An election must be made for each trade or business. An anti-abuse rule specifies that no election may be made for a trade or business that leases at least 80 percent of its real property to either the owner of the property or to a related party.
NMHC/NAA welcome comments members may have on the proposed regulations. Please contact Matthew Berger at firstname.lastname@example.org with issues and concerns.
To learn more about issues related to interest deductibility, visit our tax policy advocacy page.
- Bipartisan Multifamily Depreciation Bill Introduced
- IRS Delays Implementation of New Partnership Tax Forms
- Real Estate Industry Multifamily Depreciation Parity Act Letter to House and Senate – December 2019
- Real Estate Group Letter to IRS Regarding New Partnership Tax Forms – November 2019
- Real Estate Industry Urges Congress to Correct Depreciation Oversight in Tax Cuts and Jobs Act Legislation