The hope, Wiener said, is that the Treasury Department can quickly come out with guidance on how residential rental businesses can apply for refunds by amending their 2018 and 2019 tax returns.
Based on the JCT’s score of the omnibus bill, during the fiscal year ending Sept. 30, 2021, alone, property owners and developers could benefit to the tune of about $1.2 billion from the Treasury, including refunds.
Before the 2017 tax overhaul, residential rental property owners generally could deduct all of their business interest expenses from their taxes, even if they were so highly leveraged that interest costs outweighed income.
Meanwhile, they used what’s known as the general depreciation system which allowed the cost of a residential rental property to be written off over 27.5 years. So, besides interest expenses, owners could also deduct 3.6 percent of a property’s value every year from their taxes.
The tax overhaul changed both of those deductions for rental property owners.
To help offset a big corporate tax rate cut, the law limited how much interest expense businesses could write off to 30 percent of taxable income.
“Congress said, ‘You got to pay the piper' ” if you’re a debt-laden business, said Jason D. Dexter, managing director of certified public accountant KPMG’s Washington National Tax Practice.
That would have been a tough blow for owners of smaller housing properties like duplexes and four-unit buildings that are constantly borrowing funds to fix roofs, replace windows and the like, Ashley said.
So the law also gave businesses a way around the interest deduction limits, if they were willing to operate under what’s known as the alternative depreciation system — which for commercial and residential property owners is typically a 40-year depreciation schedule. That’s the equivalent of a smaller 2.5 percent annual deduction than under prior law.
The 2017 law’s drafters decided that residential rental property owners should take less of a hit than commercial real estate firms, however, so they wrote into the legislation a more generous 30-year depreciation schedule for residential properties.