Accelerated Cost Recovery System; MACRS; ADS (I.R.C. 168)

ADS for Electing Real Property Trade or Business (168(g)(8)

Rev. Proc. 2019-08 (December 21, 2018) clarifies and confirms that the alternative depreciation system (ADS) applies to existing property as it does to newly-acquired property upon election made to be an electing real property trade or business.  The result is the application of ADS to property such as residential rental property.  Remember that ADS does not otherwise apply to residential rental property financed with proceeds of bonds issued under I.R.C. 142(a)(7).  ADS requires depreciation over 40 years for such property placed in service before 2018 and 30 years for such property placed in service after 2017.

Resources:

T.D. 8033: In T.D. 8033, issued under the 1954 Internal Revenue Code, as amended, the IRS indicated that “predominant use” (especially for purposes of sec. 168(h)(1)(D)) means use that is for more than 50 percent of the time.  See Topical Tax Brief; Treas. Reg. § 1.168(j)–1T.  The temporary regulations define the matter as follows:

‘‘Predominantly used’’ means that for more than 50 percent of the time used, as determined for each taxable year, the real or personal property is used in an unrelated trade or business the income of which is subject to tax under section 511 (determined without regard to the debt-financed income rules of section 514). If only a portion of property is predominantly used in an unrelated trade or business, the remainder may nevertheless be tax-exempt use property.

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