On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The Act includes many provisions aimed at mitigating the economic impact of the coronavirus outbreak, such as cash rebates to individuals and loans and tax credits to businesses. However, the Act also contains several modifications and technical corrections to the 2017 Tax Cuts and Jobs Act that could significantly benefit real estate owners.

Background

Many rental properties generate losses for federal income tax purposes. Prior to 2018, as long as an individual owner of rental real estate was treated as a real estate professional for purposes of the passive loss limitations, the owner was free to use such losses to shelter portfolio income such as interest, dividends, and capital gains. However, as part of the 2017 Tax Cuts and Jobs Act, Congress enacted Section 461(l) of the Internal Revenue Code. Section 461(l) generally provided that, for years 2018 through 2025, deductions from trades or businesses could only be used to offset (1) income attributable to trades or businesses and (2) $250,000 of other income for single taxpayers and $500,000 for married couples filing jointly (subject to annual inflation adjustments). Any deductions in excess of these limitations (so-called “excess business losses”) were disallowed and carried over to the following year. Section 461(l) did not apply to C corporations.

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