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Rules on Depreciation of Multifamily Properties Need Clarification, Groups Say

DEC. 21, 2018

Rules on Depreciation of Multifamily Properties Need Clarification, Groups Say

DATED DEC. 21, 2018
DOCUMENT ATTRIBUTES
  • Institutional Authors
    National Multifamily Housing Council
    National Association of REALTORS
    American Seniors Housing Association
    Nareit
    National Association of Home Builders
    Institute of Real Estate Management
    Real Estate Roundtable
    National Apartment Association
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Real estate
  • Jurisdictions
  • Tax Analysts Document Number
    2019-4397
  • Tax Analysts Electronic Citation
    2019 TNT 25-26
[Editor's Note:

An attachment can be viewed in the PDF version of the document.

]

December 21, 2018

The Honorable Steven T. Mnuchin
Secretary of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220

Dear Secretary Mnuchin:

The undersigned real estate associations would like to take this opportunity to thank the Administration for working diligently to issue guidance with respect to the Tax Cuts and Jobs Act (the “Act”), landmark tax reform legislation that we believe holds great promise for generating economic growth and fostering job creation.

As multifamily housing firms now begin to implement the new law, we want to draw your attention to a certain provision that we request the Treasury Department clarify so that the industry can build the 4.6 million new apartment units our nation needs by 2030. Without tax certainty, we are concerned that capital could sit on the sidelines and not be fully deployed.

Our request is that the Treasury Department act swiftly to avoid a potential unintended consequence regarding the depreciation of multifamily properties. In particular, we ask that the Treasury Department either issue a notice or use forthcoming regulations to clarify that existing multifamily buildings be depreciated over 30 years for firms that elect out of limits on interest deductibility.

By way of background, a provision of the Act limits the deductibility of interest expense, but allows a real property trade or business to elect out of the limitation if the trade or business applies the alternative depreciation system (ADS) to its real property. The Act also reduced the recovery period for residential rental property from 40 years to 30 years for purposes of the ADS.

It is unclear under the Act whether electing real property trades or businesses should apply a 30- or 40-year life to property placed in service before 2018. The confusion arises because the interest deduction limitation rules are based on taxable year concepts and have an effective date of taxable years beginning after 2017, while the effective date for the ADS recovery period change is based on a placed-in-service concept (as depreciation changes generally are). It is the combination of two different types of effective dates in the Act that gives rise to the confusion.

Treasury has issued proposed regulations under Section 163(j) regarding the ability of real property firms to elect out of the interest disallowance limitations. However, those rules do not fully explain the consequences of making the irrevocable election, particularly how existing property is treated under the election. We are concerned that without further guidance, taxpayers may be uncertain as to whether they should make the election.

While we believe that Congress’ intent was to apply the 30-year period to all multifamily buildings, we are extremely concerned that without clarification, the statute potentially could be read to require that properties in existence prior to 2018 be depreciated over 40 years with regard to their remaining life.

We believe that reading the statute to require a 40-year depreciation period for multifamily properties in existence prior to 2018 does not reflect Congressional intent. (See the attachment that traces through the legislative evolution of the relevant provisions of the Act.) Moreover, there are few policy arguments for requiring real estate firms electing out of interest deductibility limits to depreciate existing buildings over 40 years (instead of the previously applicable 27.5 years), while allowing only new buildings to be depreciated over 30 years. Congress seems unlikely to have consciously wished to make such a drastic change.

Our view is that the Treasury Department has the authority to enable existing multifamily properties to be depreciated over 30 years. Treasury can do so either using the broad authority provided in Section 163(j) that addresses how real property trades or businesses elect out of limits on interest deductibility or under the “change of use” authority of Section 168(i)(5).

Specifically, Section 163(j)(7) provides that “Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be irrevocable.” One consequence of making the election is that real property trades or businesses must depreciate real property using ADS. We believe that the “in such manner” language provides the Treasury Department with sufficient authority to allow electing real property trades or businesses to use post-enactment ADS (i.e., the 30-year life) for purposes of depreciating multifamily property. In other words, Treasury can allow real estate firms to make the option of interest deductibility limitation in such manner that requires a 30-year ADS life.

In addition, the legislative history makes it clear that Congress intended that the election out of the interest limitation and the required use of ADS be treated as a change in use of the property. (See, footnote 455 of the Senate Finance Committee report). Treasury has broad authority under Section 168(i)(5) to provide rules to implement changes in use of depreciable property, including rules to provide when such property is deemed placed in service.

In sum, we ask that the Treasury Department issue guidance that would enable real estate firms that elect out of the interest limitation to depreciate property over a 30-year ADS schedule. We are concerned that if not done quickly, many owners of existing multifamily assets will be unclear as to how the tax law should apply. The difference between 30 years or 40 years may be significant enough for some owners so as to influence whether they make the election. Without guidance, many owners might interpret the statute conservatively and depreciate the remaining lives of existing buildings using the 40-year ADS schedule. This would unnecessarily increase their tax liability and disrupt cash flows, reducing their ability to invest in their assets or develop new properties. That result would be contrary to the goal of the tax reform bill, and we ask that it be avoided.

We thank you for considering our views and again appreciate all you have achieved to date. Please do not hesitate to contact Cindy Chetti, the National Multifamily Housing Council’s Senior Vice President of Government Relations, at 202-974-2300 should any questions arise.

Sincerely,

National Multifamily Housing Council

National Apartment Association

American Seniors Housing Association

Nareit

National Association of Home Builders

NATIONAL ASSOCIATION OF REALTORS®

CCIM Institute

Institute of Real Estate Management

The Real Estate Roundtable

cc:
The Honorable David Kautter
Assistant Secretary (Tax Policy)
Department of Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220

The Honorable Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

The Honorable William M. Paul
Acting Chief Counsel and Deputy Chief Counsel (Technical)
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

DOCUMENT ATTRIBUTES
  • Institutional Authors
    National Multifamily Housing Council
    National Association of REALTORS
    American Seniors Housing Association
    Nareit
    National Association of Home Builders
    Institute of Real Estate Management
    Real Estate Roundtable
    National Apartment Association
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Real estate
  • Jurisdictions
  • Tax Analysts Document Number
    2019-4397
  • Tax Analysts Electronic Citation
    2019 TNT 25-26
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