The Tax Act and Real Estate—The Limitation on Deductibility of Interest

Real Estate Securities columnist Peter M. Fass continues his discussion of changes affecting real estate including the he limitation on the deductibility of interest and its application to real estate.

July 31, 2018 at 11:16 AM

2 minute read

By Peter M. Fass

Summary of the Limitation

business interest income, and
30 percent of adjusted taxable income (ATI). For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2022, ATI is taxable income other than items not allocable to a trade or business, business interest income and deductions, depreciation, amortization, and depletion, the 20 percent pass-through deduction for business income, and net operating losses (NOLs). For taxable years beginning after Dec. 31, 2021, depreciation, amortization, and depletion is excluded from the calculation.
For taxpayers with relatively low leverage, the exclusion of depreciation in determining ATI through 2021 might produce a situation where interest deductions would not be limited until 2022, such that the more beneficial depreciation and expensing provisions could justify a delay in the election.
Any disallowed interest may be carried forward indefinitely.
Partnerships are evaluated on a separate entity basis, with excess ATI allowed to flow up to partners in certain circumstances.

Exclusion From the Interest Limitation

New permanent Alternative Depreciation System (ADS)

Residential real estate: 27.5 years regular period and new 30 year ADS period
Nonresidential real estate: 39 years regular period and 40 year ADS period
Qualified improvement property: new 15 year (straight line) regular period and 20 year ADS period
The new depreciable periods apply to taxable years beginning after 2017. It is not clear how the amendments apply to existing property.