Depreciation of Certain Residential Rental Property Over 30-Year Period

The Tax Cuts and Jobs Act (“TCJA”) allowed a real property trade or business to elect out of the business interest deduction limitations imposed by the TCJA under Section 168(j) of the Internal Revenue Code. However, the electing real property trade or business was required to treat the elected-for nonresidential real property, qualified improvement property, and residential rental property, as being subject to the Alternative Depreciation System (“ADS”) for tax years beginning after 12/31/2017. Also, the TCJA changed the ADS recovery period for residential rental property from 40 years to 30 years for property placed in service after 12/31/2017.

On December 27, 2020, President Trump signed the Consolidated Appropriations Act 2021 which includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“TCDTR”). Section 202 of the TCDTR amends Section 13204(b) of TCJA by providing that for tax years beginning after 12/31/2017, a 30-year ADS depreciation period is assigned to residential rental property even though it was placed in service before 01/01/2018 and if such residential rental property is held by an electing real property trade or business, and wasn’t subject to the ADS before 01/01/2018.

Frank L. Leffingwell is a tax attorney in the firm’s Tax Planning & ControversyEstate Planning, Probate & Trusts, and Real Estate sections.