ADS Background Information
- Under the General Depreciation System (GDS), the depreciable life for residential real property is 27.5 years.
- Prior to the 2017 Tax Cuts and Jobs Act (TCJA), under the Alternative Depreciation System (ADS), the depreciable life for residential real property was 40 years.
- TCJA changed the ADS depreciable life to 30 years for residential real property placed in service after December 31, 2017.
- TCJA introduced a rule limiting the amount of interest deduction for certain taxpayers.
- TCJA allowed certain taxpayers to elect out of the interest deduction limitation by making a real property trade or business (RPTOB) election under IRC Sec. 163(j)(7)(A)(ii).
- As a condition for making the RPTOB election, if the taxpayer was using the GDS-27.5 year depreciation method for residential real property, the taxpayer is required to convert the depreciation method from GDS to ADS. Prior to enactment of CAA, it would be ADS-40 year for residential real property placed in service before January 1, 2018 and ADS-30 year for properties placed in service on or after January 1, 2018. The conversion from GDS to ADS results in a longer depreciable life and hence, a lesser amount of annual depreciation expense.