On June 17, 2021, the IRS released Revenue Procedure 2021-28 and Revenue Procedure 2021-29 that provide guidance for an electing Real Property Trade or Business (RPTOB) to conform to the use of a depreciation recovery period of 30 years under the Alternative Depreciation System (ADS) for residential rental property placed in service before January 1, 2018.
As mentioned in our earlier blog, Consolidated Appropriations Act Changes the ADS Depreciable Life, the Consolidated Appropriations Act, 2021 (CAA) retroactively changed the ADS depreciable life from 40 years to 30 years for pre-2018 residential real estate held by a RPTOB. Prior to the enactment of CAA on December 27, 2020, a taxpayer electing to be a RPTOB needed to convert the depreciation method for residential real estate placed in service prior to 2018 from GDS-27.5 year to ADS-40 year. With the changes brought upon by CAA, a RPTOB may retroactively apply the ADS-30 year depreciation method.
Earlier this year, it was uncertain what steps a taxpayer would need to take to effectuate a retroactive change in depreciation method. Revenue Procedure 2021-28 and Revenue Procedure 2021-29 have now provided some clarity.
For taxpayers wanting to change the method of depreciation to conform to the retroactive recovery period change, Revenue Procedure 2021-28 indicates that the taxpayer can do so by filing either:
(1) an amended return or an administrative adjustment request (AAR) for those earlier tax years impacted by the change, or
(2) a Form 3115, Application for Change in Accounting Method, for the 2020 tax return and recognize the “catch-up” depreciation adjustments pertaining to earlier years in the 2020 tax return.
Revenue Procedure 2021-29 allows a partnership that is subject to the centralized audit regime enacted as part of the Bipartisan Budget Act of 2015 (referred to as “BBA partnership”) to file an amended return instead of an AAR to retroactively change the recovery period to 30 years. Normally, for a BBA partnership to adjust the amount of a partnership-related item for any partnership tax year, it must file an AAR. However, for this change in depreciation recovery period, Revenue Procedure 2021-29 is allowing a BBA partnership to file an amended return if it is done so on or before October 15, 2021. If the BBA partnership is not able to file the amended return(s) by October 15, 2021, the partnership can still retroactively change the recovery period by filing an AAR.
If you have any questions, please contact us at firstname.lastname@example.org about your real estate development tax options or connect with your engagement lead member directly. We can help you determine accounting or tax planning decisions for your RPTOB.
You may also be interested in this blog post about changes to the Business Energy Credit under CAA.