IRS Issues Revenue Procedures for Real Estate Partnerships

calendar iconJune 29, 2021

Last week the IRS issued Revenue Procedure (Rev. Proc.) 2021-28 and Rev. Proc. 2021-29, which address how to take advantage of the December 2020 legislation that retroactively changed the Alternative Depreciation System (“ADS”) from 40 years to 30 years. This change relates to property acquired before January 1, 2018, as properties acquired after that date were already granted a 30-year life under the Tax Cuts and Jobs Act.

Rev. Proc. 2021-28 changes the rules for residential real property by allowing properties placed in service before January 1, 2018, to reduce the recovery period from 40 years to 30 years by electing to be treated as a real property trade or business under section 163(j)(7)(B). Furthermore, this Rev. Proc. modifies the language in Rev. Proc. 2019-43, treating this accounting method change as automatic.

Rev. Proc. 2021-29 outlines how partnerships subject to the BBA partnership-level audit rules may amend tax returns for years that started in 2018, 2019, or 2020, to retroactively take advantage of the 30-year life change. This is especially advantageous for entities electing out of the section 163(j) business interest deduction limitation, as those companies must elect ADS for nonresidential real property, residential real property, and qualified improvement property.

Rev. Proc. 2021-29 allows a BBA partnership to change its recovery period under section 168(g) by filing an amended partnership return rather than an administrative adjustment request under section 6227. An amended return can be filed electronically or on paper and must include a statement on both the entity return and each corresponding Form K-1 showing “FILED PURSUANT TO REV PROC 2021-29.” Partnerships currently under audit may also take advantage of this change by notifying the Revenue Agent that the partnership seeks to amend its return.

Partnerships that previously had not elected out of the section 163(j) business interest deduction limitation should evaluate taking advantage of this retroactive change by filing an amended return.

For more information or guidance on the application of these Revenue Procedures, contact your Cherry Bekaert tax advisor.