On December 29, 2020, the IRS released Rev. Proc. 2021-09 clarifying safe harbor elections for real property trade or businesses (RPTB) that manage or operate a qualified residential living facility to opt out of business interest deduction limitations under Section 163(j).
Created during the Tax Cuts and Jobs Act (TCJA) in 2018, and later amended by the CARES Act in 2020, 163(j) dictates that certain taxpayers are limited to deducting business interest expense to 50% of adjusted taxable income (ATI) starting in tax years 2019 for C and S Corporations, and 2020 for partnerships. Any amount of interest disallowed may be carried forward indefinitely and utilized when the taxpayer abides by the annual limitation in that future year. Some taxpayers are exempt from the provision including eligible small business and those electing to be a real property trade or business. The 163(j) residential living facility safe harbor applies to taxable years beginning after December 31, 2017.
In July of 2020, Notice 2020-59 proposed a safe harbor for electing real property trade or business which has since been finalized. To be eligible, the trade or business must:
- Operate or manage multiple rental dwelling units that generally serve as a primary residence on a permanent or semi-permanent basis;
- Provide supplemental assistive, nursing or other routine medical services; and
- Have an average customer use of the dwelling units for 30 days or more.***
- ***This period was updated from July 28, 2020 Notice 2020-59 which initially stated 90 days.
A residential living facility can be a nursing home, continuing care retirement community, independent living facility, assisted living facility, memory care facility, or skilled nursing facility.
If a RPTB election is made, depreciation on real property is calculated under the alternative depreciation system (ADS) and bonus depreciation is not allowed on certain property. The ADS life for residential rental real property was modified in the Consolidated Appropriations Act, 2021 to allow for a 30-year ADS recovery period on all residential real estate, including assets placed into service on or before December 31, 2017.
The safe harbor RPTB election for residential living facilities is a one-time, irrevocable election and applies to all subsequent years if the facility continues to meet the safe harbor requirements. For any questions please contact your Mueller Prost specialist.