Revenue Procedure 2021-28 gives guidance for electing real property trades or businesses to implement retroactive changes to the recovery periods made by Section 202 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
“Historically, prior to the Tax Cuts and Jobs Act, the [Alternative Depreciation System] life for residential property was 40 years if it met one of the ADS definitions,” explained Ed Meyette, a partner at Top 10 Firm Crowe. “The TCJA expanded the definition of ADS property to include real estate trades or businesses and it also changed the ADS recovery period from 40 to 30 years,” he said.
The provision under the TCJA only applied to property placed in service after 2017, he explained: “The TCDTRA came along last year and changed the 40-year recovery period to 30 years, and expanded the eligibility to residential property placed in service prior to 2018 that the TCJA had left out. Essentially, this revenue procedure is allowing taxpayers to now go back and recompute their depreciation based on that change.”
For example, suppose a taxpayer placed residential property into service in 2016 with a 27.5 depreciation period. Then, in 2019, they made a real property trade or business election, so starting in 2019 they were required to change the depreciation recovery period from 27.5 years to 40 years. In 2020, the TCDTRA retroactively made it possible for the property placed in service in 2016, that they just recomputed to have a 40 year-useful life, to be recomputed to have a 30-year useful life. “And it does this retroactively, so the taxpayer now has an incorrect depreciable life for that property,” Meyette added.
“Revenue Procedure 2021-28 gives taxpayers the procedure to update that change that the TCDTRA made. It gives an avenue to change the depreciation period again, from the now-impermissible 40-year recovery period to a 30-year period,” he concluded.
The taxpayer can choose one of three ways to bring about the change, according to Crowe partner Dave Strong.
“It’s done generally by either filing an amended return, or an administrative adjustment request (AAR) or by filing an accounting method change,” he said. “Under the general rule, the use of an impermissible method for only one year doesn’t establish that method — it has to be used on two consecutive returns. So even if you only use the method for one year, Revenue Procedure 2021-28 allows the use of an accounting method change to make the correction.”
“The other option in the revenue procedure allows this change to be done on an automatic method change basis,” he said. “This is generally only made within the tax year to be effective, but under the automatic rule, the request can be filed up to the due date of the tax return including extensions. If the taxpayer has not filed their 2020 return yet they would still have the option to file an automatic accounting method change to make the correction for the proper ADS life.”
Taxpayers that previously made an election under IRC Section 163(j)(7)(B) and that hold residential rental property that was placed into service by the taxpayer before Jan. 1, 2018, should review their prior method of depreciating such property to determine any impact of the retroactive 30-year ADS life provided by the TCDTRA, said Meyette.
“Given the flexibility in the revenue procedure, taxpayers should carefully consider the manner and tax year in which a method change is made to properly apply a 30-year ADS life,” he said.
