If a company elects to be a real property trade or business, does the depreciable life for land improvements switch to the Alternative Depreciation System (ADS)?
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Yes, if a company elects to be an "electing real property trade or business" under section 163(j)(7)(B), the depreciable life for land improvements does switch to the Alternative Depreciation System (ADS), but with important nuances regarding the applicable recovery period.
1. Legal Framework
a) ADS Requirement for Electing Real Property Trade or Business
- Under section 168(g)(1), property held by an electing real property trade or business must be depreciated using ADS. This includes nonresidential real property, residential rental property, and qualified improvement property, as well as any other property required by law or election to use ADS.
b) Land Improvements: Recovery Periods
- Land improvements are generally classified as 15-year property under the General Depreciation System (GDS), with a 15-year recovery period and 150% declining balance method.
- Under ADS, the recovery period for land improvements is 20 years, using the straight-line method.
c). Effect of the Election
- When a taxpayer elects to be an electing real property trade or business, the law requires the use of ADS for:
- Nonresidential real property (40 years under ADS)
- Residential rental property (30 years under ADS for property placed in service after 2017, or as updated by subsequent law)
- Qualified improvement property (20 years under ADS)
- Any other property required by law or election to use ADS, including land improvements.
- The IRS and Treasury guidance confirm that, for an electing real property trade or business, land improvements are subject to ADS and must be depreciated over 20 years using the straight-line method.
d). No Exception for Land Improvements
- The requirement to use ADS for an electing real property trade or business is not limited to buildings; it extends to all property required to use ADS, including land improvements. There is no exception in the statute or regulations for land improvements.
2. Practical Application
- Before Election: Land improvements are depreciated over 15 years (GDS), 150% declining balance.
- After Election: Land improvements must be depreciated over 20 years (ADS), straight-line method.
3. Example
Suppose a company that owns a shopping center elects to be an electing real property trade or business. The company installs new sidewalks and landscaping (land improvements). Because of the election:- The company must use ADS for these land improvements.- The recovery period is 20 years, straight-line, not 15 years, 150% declining balance.
4. Summary Table
5. Conclusion
Yes, if a company elects to be a real property trade or business, the depreciable life for land improvements switches to the Alternative Depreciation System (ADS), and the recovery period becomes 20 years, straight-line. This is required by section 168(g) and confirmed by IRS guidance.
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