IRS Issues Guidance on Option to Change §163(j) Elections for Real Estate and Farming Businesses

With recent tax law changes contained within the CARES Act, including a technical correction to the definition of Qualified Improvement Property (QIP) and modifications to the limit of deductible interest expense under Section 163(j) of the Internal Revenue Code, many taxpayers have begun to ask whether there will be any provision that allows for the withdrawal of a prior election to "opt-out" of the interest limitation.

Most notable among those taxpayers are property owners that placed in service significant renovations since the effective date of the Tax Cuts and Jobs Act that now meet the corrected QIP definition. Those owners are realizing substantially reduced tax benefits from the corrected definition as a result of the election to be exempt from the interest limitation rules, and might not have made an election had the retroactive QIP definition been in effect as of the TCJA.

On April 10, the IRS issued Revenue Procedure 2020-22, providing guidance on the election to be exempt from the interest limitation rules under IRC Section 163(j) for real property trades or businesses and farming businesses, and allowing certain taxpayers the option to withdraw an election or to make a late election for tax years beginning in 2018, 2019 or 2020. To change or to make a late Section 163(j) election, a taxpayer must file a timely amended tax return, amended form 1065 or administrative adjustment request (AAR), as applicable, for the taxable year on or before October 15, 2021 and any affected succeeding tax years.

To withdraw an election to be exempt from the interest limitation rules under Section 163(j), a taxpayer will determine its depreciation expense in accordance with Section 168 as if the election to be exempt from the Section 163(j) interest limitation rules had never been made, and include an election withdrawal statement with the amended return.

A taxpayer may make a late election to be exempt from the interest limitation rules under Section 163(j) provided the taxpayer was qualified to have made the election in that tax year. The taxpayer must also include any adjustments to taxable income for the late election including the determination of depreciation for certain property in accordance with the alternative depreciation system with the amended tax return.

If you’re interested in learning more about the new provisions allowing for a withdrawal of an election out of Section 163(j) interest limitation rules or to make a late election for the 2018, 2019 or 2020 tax years, or any other strategies to maximize the tax benefits of real estate ownership, contact a member of the Schneider Downs Real Estate Team or email [email protected].

Please visit our Coronavirus resource page at for related content.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2023 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Automobile, Tax BY Brett Cubellis
Explaining the Transfer/Advance Payment of Clean Energy Credits and Energy Credits Online Registration
New Research and Development Capitalization Requirement Shuffles System
Contractors May Benefit From SALT Cap Workaround
2023 Legislative & Regulatory Update
Understanding Coronavirus State and Local Fiscal Recovery Funds Audit and Reporting Requirements
Tax BY Kirk Mitchell
Can “Moore” Tax be Refunded from IRS? How to Protect Your Potential Claim for Refund of §965 Foreign Corporation Transition Tax
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.