Revenue Procedure 2021-28 provides necessary procedural guidance for electing real property trades or businesses, as defined in IRC Section 163(j)(7)(B), to implement retroactive changes made by Section 202 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA), which was enacted as part of the Consolidated Appropriations Act of 2021. Under TCDTRA, certain electing real property trades or businesses that placed residential rental property in service before Jan. 1, 2018, are required to use a 30-year recovery period versus 40 years established through changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) for such property.
Revenue Procedure 2019-08
An eligible trade or business can make an election under IRC Section 163(j)(7)(B) to be an electing real property trade or business. An electing real property trade or business must use the alternative depreciation system (ADS) to depreciate any nonresidential real property, residential rental property, and qualified improvement property. The ADS provides a longer recovery period than provided under the general depreciation system (GDS). Revenue Procedure 2019-08 clarified that an electing real property trade or business must use ADS to depreciate such property placed in service before, during, and after the election year, and that making the election results in a change in use of such property placed in service prior to the election year. Thus, making the election under IRC Section 163(j)(7)(B) means that depreciation is determined in the year of the election and any subsequent taxable year as if the property originally had been placed in service with the longer ADS recovery period.
Changes made by TCJA
Prior to the TCJA, residential rental property was assigned a 40-year ADS recovery period. The TCJA amended the statute to provide a 30-year ADS recovery period for residential rental property but only to such property placed in service after Dec. 31, 2017. However, Section 202 of the TCDTRA, which was enacted three years after the TCJA, retroactively amended the statute to require a 30-year ADS life to any residential rental property that is placed into service before Jan. 1, 2018, and that is held by an electing real property trade or business, provided such property was not previously subject to ADS (other than by reason of the Section 163(j) election). The 30-year ADS life is mandatory. Thus, procedural guidance was necessary for taxpayers to be able to change their method of accounting to comply with the statute.
