On December 24, 2018, the IRS issued Rev. Proc. 2018-31; IR-2018-257 which clarifies several outstanding questions regarding the business interest deduction rules established by the Tax Cuts and Jobs Act (TCJA). These rules are in effect for the 2018 tax filing season and businesses that wish to deduct business interest must consider their implications.
Specifically, the Rev. Proc. clarifies the following for commercial real estate related businesses:
- There is no need to file a 3115 when converting nonresidential, residential or Qualified Improvement Property (QIP) to ADS due to the interest limitation.
- ADS treatment applies to “old” and newly acquired nonresidential, residential or QIP property.
- 30-year ADS life for residential real property only applies to property placed-in-service after 12/31/17. This implies that already-held residential real property on the books prior to 1/1/18 would be depreciated using the 40-year ADS life for an electing real estate entity.
- “Change in Use” rules apply. Generally, these rules require the adjusted depreciable basis of the MACRS property as of the beginning of the year of change to be depreciated over the remaining portion of the new, longer recovery period as of the beginning of the year of change.
- Bonus depreciation previously claimed on assets that are now required to use ADS is not recaptured.
- Electing farmers must depreciate any existing and newly acquired property with a MACRS recovery period of ten years or greater using ADS.
We anticipate additional clarifications in the near future to address remaining questions regarding the comprehensive TCJA rule changes. As these develop, Capstan will continue to blog on this topic and communicate relevant information that impacts commercial real estate.
If you have questions, please do not hesitate to reach out to us. Our office number is 215-885-7510. We can also be reached via email:
Terri S. Johnson tjohnson@capstantax.com
Carly Ferris cferris@capstantax.com
Bruce A. Johnson bjohnson@capstantax.com
Have a great start to 2019!