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IRS Guidance Allows Partnerships to Apply 30-Year Recovery Period to Rental Property
(Parker Tax Publishing June 2021)
The IRS issued a procedure for partnerships to file amended returns on Form 1065 and furnish amended Schedules K-1 for tax years beginning in 2018, 2019, or 2020, in order to retroactively apply a 30-year recovery period for residential rental property placed in service before January 1, 2018. Under the procedure, which is intended to be implemented in tandem with Rev. Proc. 2021-28, eligible partnerships may file amended returns and furnish amended Schedules K-1 on or before October 15, 2021. Rev. Proc. 2021-29.
Background
The Bipartisan Budget Act of 2015 (BBA) replaced the unified partnership and litigation rules enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) with a centralized partnership audit regime that, in general, determines, assesses, and collects tax at the partnership level. The centralized partnership audit procedures enacted by the BBA are found in Code Sec. 6221 through Code Sec. 6241. The BBA centralized partnership audit procedures apply to all partnerships, unless the partnership elects under Code Sec. 6221(b) not to have those procedures apply. Partnerships subject to the centralized partnership audit regime are referred to as BBA partnerships.
Code Sec. 6031(a) requires every partnership to file an annual return on Form 1065 stating the items of its gross income and the allowable deductions and such other information as required by forms and regulations. Form 1065 includes Schedule K-1, which reports a partner's name, taxpayer identification number, and distributive share of partnership-related items and other information related to the partner's interest in the partnership. Code Sec. 6031(b) requires that a partnership required to file a return under Code Sec. 6031(a) furnish a copy of the Schedule K-1 to each partner. In general, Code Sec. 6031(b) also prohibits BBA partnerships from amending the information required to be furnished to their partners after the due date of the return, unless specifically provided by IRS guidance.
Section 202 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) was enacted as part of the Consolidated Appropriations Act, 2021 (Pub. L. 116-260). Section 202 of TCDTRA retroactively allows a recovery period of 30 years under the alternative depreciation system (ADS) in Code Sec. 168(g) for certain residential rental property, as defined in Code Sec. 168(e)(2)(A), placed in service before January 1, 2018, held by an electing real property trade or business as defined in Code Sec. 163(j)(7)(B), and not previously subject to the ADS.
Rev. Proc. 2021-29
On June 17, the IRS issued Rev. Proc. 2021-29, which explains how a BBA partnership that wishes to change its recovery period under Code Sec. 168(g) for residential rental property placed in service before January 1, 2018, in accordance with Section 202 of the TCDTRA may do so without filing an administrative adjustment request (AAR) under Code Sec. 6227.
Observation: Rev. Proc. 2021-29 is intended to be implemented in tandem with Rev. Proc. 2021-28, which explains how a taxpayer changes its method of computing depreciation to comply with Section 202 of the TCDTRA.
Rev. Proc. 2021-29 allows BBA partnerships the option to file an amended return instead of an AAR, though it does not prevent a partnership from filing an AAR to obtain the benefits of the TCDTRA or any other tax benefits to which the partnership is entitled. A BBA partnership that files an amended return pursuant to Rev. Proc. 2021-29 is still subject to the centralized partnership audit procedures enacted by the BBA.
Under Rev. Proc. 2021-29, BBA partnerships that filed a Form 1065 and furnished all required Schedules K-1 for the tax years beginning in 2018, 2019, or 2020, and did so prior to the issuance of Rev. Proc. 2021-29 may file amended partnership returns and furnish corresponding Schedules K-1 on or before October 15, 2021. The amended returns must take into account tax changes under Section 202 of the TCDTRA, but eligible BBA partnerships may make any changes on their amended returns.
Eligible Partnerships
The filing and furnishing option provided in Rev. Proc. 2021-29 is available only to BBA partnerships that filed Forms 1065 and furnished Schedules K-1 for the partnership tax years beginning in 2018, 2019, or 2020, and did so prior to the issuance of Rev. Proc. 2021-29. The filing and furnishing option is only available to:
(1) BBA partnerships within the scope of Section 3 of Rev. Proc. 2021-28 that have residential rental property within the scope of Section 3 of Rev. Proc. 2021-28 and that choose to change either or both of their methods of depreciation or general asset account treatment for such property by filing an amended Form 1065 in accordance with the procedures in Section 4 of Rev. Proc. 2021-28 as applicable, or
(2) BBA partnerships within the scope of Rev. Proc. 2020-22 that choose to make a late Code Sec. 163(j)(7) election by filing an amended Form 1065 in accordance with procedures in Section 4 of Rev. Proc. 2020-22.
For purposes of Code Sec. 6222, which provides that partners treat partnership items consistently with how the BBA partnership treated such items on its return, the amended return replaces any prior return (including any AAR filed by the partnership) for the tax year for purposes of
determining the partnership's treatment of partnership-related items.
Procedures for Filing Amended Returns
To take advantage of the option to file an amended return provided by Rev. Proc. 2021-29, a BBA partnership must file a Form 1065 (with the "Amended Return" box checked) and furnish corresponding amended Schedules K-1. The BBA partnership must clearly indicate the application of Rev. Proc. 2021-29 on the amended return and write "FILED PURSUANT TO REV PROC 2021-29" at the top of the amended return and attach a statement with each Schedule K-1 furnished to its partners with the same notation. The BBA partnership may file electronically or by mail but filing electronically may allow for faster processing of the amended return.
Compliance Tip: If a BBA partnership is currently under audit for a tax year beginning in 2018, 2019, or 2020, and wishes to take advantage of the option to file an amended return provided by Rev. Proc. 2021-29, the partnership may only do so if the partnership sends notice in writing to the revenue agent coordinating the partnership's audit that the partnership seeks to use the amended return option described in Rev. Proc. 2021-29 before, or contemporaneously with, filing the amended return. The partnership must also provide the revenue agent with a copy of the amended return upon filing. If a BBA partnership has previously filed an AAR and wishes to file an amended return pursuant to Rev. Proc. 2021-29 for the same tax year, the partnership should use the items as adjusted in the AAR, where applicable, in lieu of any reporting from the originally filed partnership return.
If, under Notice 2019-46, a partnership has applied the rules of the proposed global intangible low-taxed income (GILTI) regulations under Prop. Reg. Sec. 1.951A-5 for its tax years ending before June 22, 2019, the partnership may continue to apply the rules of the proposed regulations for purposes of filing an amended Form 1065 for tax years to which Notice 2019-46 applies under Rev. Proc. 2021-29 if the partnership furnishes amended Schedules K-1 consistent with the proposed regulations and provides appropriate notifications to its partners under Notice 2019-46 by October 15, 2021. If a partnership applies the final GILTI regulations under Reg. Sec. 1.951A-1(e), any amended Schedules K-1 issued under Rev. Proc. 2021-29 must be consistent with those final regulations.
For a discussion of the 30-year recovery period for residential rental property, see Parker Tax ¶94,330. For a discussion of Form 1065 filing requirements, see Parker Tax ¶28,550.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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