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Treasury Clarifies Intent of 163(j) Real Estate Election Guidance

Posted on Sep. 30, 2020

The government intended to allow taxpayers to go back and opt out of the business interest deduction limitation regime for some years based on recently released final rules, according to a Treasury official.

Final rules released in July on section 163(j) contained favorable changes for real estate businesses that can be applied to prior years, but an earlier revenue procedure allowing taxpayers to go back and elect out of the interest limitation regime had what some feared was a limited application.

Bryan Rimmke, attorney-adviser, Treasury Office of Tax Legislative Counsel, said September 29 in an American Bar Association Section of Taxation virtual meeting that the government’s intent was to allow taxpayers to qualify to make retroactive real property trade or business elections in the revenue procedure based on the language in the final regulations.

The government in April released Rev. Proc. 2020-22, 2020-18 IRB 1, which allows some taxpayers subject to the section 163(j) deduction limits to file amended returns or administrative adjustment requests to make changes to prior positions based on changes made in the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136).

The revenue procedure allows late elections for taxpayers “if the taxpayer did not file a section 163(j)(7) election with its timely filed original Federal income tax return or Form 1065, including extensions, or withdrew an election under section 5 of this revenue procedure, for a taxable year beginning in 2018 (2018 taxable year), 2019 (2019 taxable year), or 2020 (2020 taxable year), was otherwise qualified to make an election when the return was filed, and now wants to make an election for one of those taxable years.”

Practitioners say it’s not clear how to interpret the phrase “was otherwise qualified to make an election” in the revenue procedure.  

One example of why that matters is that the final section 163(j) regulations permit a partnership that is more than 50 percent owned by real estate investment trusts to make the real property trade or business election, which means it wouldn’t be subject to the interest deduction limits. 

But practitioners said some partnerships in that scenario might be looking to go back and retroactively apply the final regulations to their 2018 tax year and make the real property trade or business election.

Jon Finkelstein of KPMG LLP said it seemed it was the government's intent in the revenue procedure to allow the final regs to be applied retroactively to make an election.

“I circled up with the IRS, and we’re taking a look at the revenue procedure and seeing if we think it needs to be changed or where that stands, but you do have the intent correct,” Rimmke replied.

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