April 15, 2020
Recent Tax Developments Affecting Real Estate
Posted by COVID-19 Rapid Response Team
There are a number of recent tax developments affecting the real estate sector. Below, we outline items where we’re seeing the greatest impact:
- Extended deadline for like-kind exchanges: If the 45-day identification period or the 180-day replacement period for like-kind exchanges ends between April 1, 2020 and July 15, 2020, those deadlines are extended to July 15, 2020.
- Extended deadline for Opportunity Zone (OZ) investments: If the 180-day period to reinvest gain into an OZ fund ends between April 1, 2020 and July 15, 2020, the deadline is extended to July 15, 2020.
- Qualified Improvement Property (QIP): QIP (generally interior improvements to nonresidential property) placed in service after September 27, 2017 has been made eligible for either bonus depreciation (immediate expensing) or 15-year depreciation. Prior to the CARES Act, these assets had to be depreciated over 39 years. Additional depreciation can be claimed on amended tax returns for prior years. We also believe that the IRS will allow taxpayers who do not wish to amend to “catch-up” depreciation on either 2019 or 2020 tax returns.
- Interest expense limitation: Section 163(j) generally limits business interest expense to 30% of earnings before interest, depreciation and amortization (50% for some businesses starting in 2019 and for partnerships starting in 2020). Real estate businesses can often elect out of this limit, at the cost of slower depreciation of real property. Now that deprecation rules and 163(j) limits have changed, taxpayers may want a “do-over” on the elections they made. New guidance grants the do-over (somewhat surprisingly, given the rigidity of the prior rules) – allowing late elections to be made and previous elections to be withdrawn, with retroactive effect.
- Net operating losses (NOLs): Taxpayers may carry back to the preceding five years NOLs generated in 2018, 2019 and 2020, including NOLs generated from QIP depreciation and extra interest expense allowed, as mentioned above. Taxpayers may choose to forego the carryback (and carry forward instead) for any of those years by making an election on their 2020 tax return. A taxpayer who chooses to carryback now has 18 months from the end of the loss year to file for a “quick” refund. For 2018 NOLs, taxpayers have until June 30, 2020 to request a quick refund. (If this deadline is missed, an amended return can be filed instead.)
- Partnership amended returns: 2015 tax law changes make it difficult for partnerships to amend returns and get refunds to their partners. New rules relax the 2015 rules, so that partnerships wishing to take advantage of COVID-19-related tax changes on amended returns can do so and allow their partners to also amend to get potential refunds.
- Business loss limitation: The limit on deducting net business losses in excess of $500,000 is suspended for tax years 2018, 2019 and 2020. This will cause some taxpayers to have extra losses for those years that they can carry back or forward.
Each of the topics described, and the interaction among them, can be very complex and should be discussed with a tax professional.
We’re Here to Help
We’re closely monitoring the hour-by-hour changes, and we will send out updates as they become available. Reach out to our Rapid Response Team if you need further information on this topic.
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