26 CFR 601.601. Rules and regulations.

26 CFR 601.601. Rules and regulations.

(Also Part I, §163(j).)

Rev. Proc. 2021-9

SECTION 1. PURPOSE

This revenue procedure provides a safe harbor that allows a trade or business that

manages or operates a qualified residential living facility, as defined in section 3.01 of

this revenue procedure, to be treated as a real property trade or business, solely for

purposes of qualifying to make the election under section 163(j)(7)(B) of the Internal

Revenue Code (Code) to be an electing real property trade or business.

SECTION 2. BACKGROUND

.01 On December 22, 2017, section 163(j) was amended by § 13301 of Pubic Law

No. 115-97, 131 Stat. 2054, commonly referred to as the Tax Cuts and Jobs Act

(TCJA). Section 163(j), as amended by the TCJA, provides rules limiting the amount of

business interest expense that can be deducted for taxable years beginning after

December 31, 2017. See TCJA § 13301(a).

.02 On March 27, 2020, section 163(j) was further amended by § 2306 of the

Coronavirus Aid, Relief, and Economic Security Act, Public Law No. 116-136, 13 Stat.

281 (CARES Act), to provide special rules for applying section 163(j) to taxable years

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beginning in 2019 or 2020.

.03 Under section 163(j)(1), the amount allowed as a deduction for business interest

expense is limited to the sum of: (1) the taxpayer’s business interest income, as defined

in section 163(j)(6), for the taxable year; (2) 30 percent of the taxpayer’s adjusted

taxable income, as defined in section 163(j)(8), for such taxable year, or 50 percent of

the taxpayer’s adjusted taxable income (if applicable, as provided in section 163(j)(10));

and (3) the taxpayer’s floor plan financing interest, as defined in section 163(j)(9), for

such taxable year.

.04 The limitation under section 163(j) on the deductibility of business interest

expense applies to all taxpayers with business interest, as defined in section 163(j)(5),

except for taxpayers, other than tax shelters under section 448(a)(3), that meet the

gross receipts test in section 448(c).

.05 Section 163(j)(5) generally provides that the term “business interest” means any

interest expense properly allocable to a trade or business. Section 163(j)(7)(A)(ii)

provides that, for purposes of the limitation on the deduction for business interest, the

term “trade or business” does not include an “electing real property trade or business.”

Thus, interest expense properly allocable to an electing real property trade or business

is not properly allocable to a trade or business for purposes of section 163(j), and is not

business interest expense that is subject to section 163(j)(1).

.06 The term “electing real property trade or business” under section 163(j)(7)(B)

means “any trade or business which is described in section 469(c)(7)(C) and which

makes an election” to be an electing real property trade or business.

.07 Section 168(g)(1)(F) provides that an electing real property trade or business

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within the meaning of section 163(j)(7)(B) must use the alternative depreciation system

for property described in section 168(g)(8). See section 163(j)(11)(A).

.08 The Department of the Treasury (Treasury Department) and the Internal

Revenue Service (IRS) published (1) proposed regulations under section 163(j) in a

notice of proposed rulemaking (REG-106089-18) in the Federal Register (83 FR 67490)

on December 28, 2018 (2018 proposed regulations), (2) final regulations under

section 163(j) (TD 9905) in the Federal Register (85 FR 56686) on September 14, 2020

(final regulations), and (3) concurrently with the publication of the final regulations,

additional proposed regulations under section 163(j) in a notice of proposed rulemaking

(REG-107911-18) in the Federal Register (85 FR 56846).

.09 Section 1.163(j)-1(b)(14) of the final regulations defines an electing real property

trade or business as one that makes an election under § 1.163(j)-9 or other published

guidance that is (1) a real property trade or business described in section 469(c)(7)(C)

of the Code and § 1.469-9(b)(2) of the final regulations, (2) a REIT that qualifies for the

safe harbor described in § 1.163(j)-9(h), or (3) a trade or business specifically

designated by the Secretary of the Treasury or his delegate in guidance published in the

Federal Register or the Internal Revenue Bulletin as a real property trade or business

for section 163(j).

.10 Section 1.163(j)-9 provides rules and procedures for making an election under

section 163(j)(7)(B) to be an electing real property trade or business. The Treasury

Department and the IRS released Rev. Proc. 2020-22, 2020-18 I.R.B. 745, (April 27,

2020) to provide the time and manner of making a late election, or withdrawing an

election under section 163(j)(7)(B) to be an electing real property trade or business for

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taxable years beginning in 2018, 2019, or 2020. Rev. Proc. 2020-22 also provides the

time and manner of making or revoking elections provided by the CARES Act under

section 163(j)(10) for taxable years beginning in 2019 or 2020. See Rev. Proc. 2020-22

for more information regarding the time and manner of making, revoking, or withdrawing

elections under section 163(j)(7) and (10).

.11 Section 469(c)(7)(C) defines a real property trade or business as any real

property development, redevelopment, construction, reconstruction, acquisition,

conversion, rental, operation, management, leasing, or brokerage trade or business.

See also § 1.469-9(b)(2).

.12 In response to the 2018 proposed regulations, commenters expressed concern

as to whether a trade or business that manages or operates a residential living facility

and also provides supplemental assistive, nursing, or routine medical services to its

customers or patients is eligible to make the election under section 163(j)(7)(B) to be an

electing real property trade or business.

.13 On September 28, 2020, the Treasury Department and the IRS published Notice

2020-59, 2020-40 I.R.B. 782, which contained a proposed revenue procedure providing

a safe harbor for a trade or business that manages or operates a qualified residential

living facility, as defined in section 3.01 of the proposed revenue procedure, to be

treated as a real property trade or business solely for purposes of qualifying to make the

election under section 163(j)(7)(B) to be treated as an electing real property trade or

business. Notice 2020-59 requested comments on the proposed revenue procedure.

.14 In response to the proposed revenue procedure in Notice 2020-59, commenters

presented three distinct concerns:

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(1) First, commenters requested that the definition of a qualified residential living

facility be modified to reduce the minimum threshold for the average period of customer

or patient use of individual dwelling units requirement from 90 days to less than 90 days,

and that the determination of the average period of customer or patient use take into

account that some customers or patients may reside at the facility without a rental

contract or other formal written lease agreement. Because Medicare and Medicaid

plans generally pay for stays that are substantially less than 90 days, commenters noted

that the 90-day average period of customer or patient use requirement would unfairly

penalize taxpayers with large numbers of Medicare and Medicaid patients and

potentially exclude taxpayers that Congress intended to be eligible to make a real

property trade or business election under section 163(j)(7)(B). Commenters also

explicitly mentioned that certain facilities that are wholly or partially licensed to receive

Medicare and Medicaid payments provide care outside of a rental contract or other

formal written lease agreement. The Treasury Department and the IRS agree with this

comment, and accordingly, this revenue procedure reduces the average period for

customer or patient use requirement from 90 days to 30 days, and allows taxpayers to

determine the average period by reference to either the number of days paid for by

Medicare or Medicaid or the number of days under a rental contract or other formal

written lease agreement.

(2) Second, commenters requested that the revenue procedure provide an

alternative test to meet certain requirements of the definition of a qualified residential

living facility. Commenters specifically proposed using the definition of “residential rental

property” under section 168(e)(2)(A) of the Code as an alternative to the requirements in

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section 3.01(1) (primary residence requirement) and 3.01(3) (average period of customer

or patient use requirement) of the proposed revenue procedure, in part because the

legislative history of the TCJA confirms that the trade or business of operating or

managing “residential rental property” housing the elderly is eligible to be a real property

trade or business despite the provision of necessary supplemental assistive services to

the residents of the residential rental property. Moreover, commenters pointed out the

linkage between section 168 and section 163(j) because section 168(g)(1)(F) provides

that an electing real property trade or business within the meaning of section 163(j)(7)(B)

must use the alternative depreciation system for property described in section 168(g)(8),

which includes residential rental property, and because the IRS has previously

concluded that various types of retirement care facilities, including independent living,

assisted living, and skilled nursing facilities, for example, may qualify as residential rental

property for purposes of section 168(e)(2)(A). Commenters also noted that taxpayers

have to determine whether their facilities qualify as residential rental property under

section 168(e)(2)(A) for purposes of calculating depreciation. They indicated that

allowing the section 168(e)(2)(A) test to be used as an alternative to the primary

residence requirement and the average period of customer or patient use requirement

would reduce taxpayer burden. The Treasury Department and the IRS agree with this

comment and this revenue procedure includes an alternative test providing that if a

taxpayer operates or manages residential living facilities that qualify as residential rental

property under section 168(e)(2)(A), then the facility also meets the requirements set

forth in section 3.01(1) and (3) of this revenue procedure.

(3) Third, commenters requested clarification on whether a taxpayer’s reliance on

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the residential living facility safe harbor to make an election under section 163(j)(7)(B) to

be an electing real property trade or business must be determined on an annual basis or

remains in effect for taxable years after the taxable year in which an initial election is

made. Generally, taxpayers may make an irrevocable one-time election under

section 163(j)(7)(B) and § 1.163(j)-9(c) to be an electing real property trade or business.

This election, once made, applies to the taxable year in which the election is made and

to all subsequent taxable years, and automatically terminates under § 1.163(j)-9(e)(1) if

the taxpayer ceases to engage in the electing trade or business. Thus, commenters

requested that the proposed revenue procedure be amended to clarify that the same

rules apply to a taxpayer relying on the safe harbor to make the election such that a

trade or business may make a one-time determination as to whether it qualifies for the

safe harbor. The Treasury Department and the IRS decline to adopt this comment. An

annual test is necessary under the safe harbor because, unlike most trades or

businesses that are subject to the electing real property trade or business provisions in

§ 1.163(j)-9, taxpayers relying solely on the safe harbor provided in this revenue

procedure must perform a mathematical calculation to determine their eligibility to make

the real property trade or business election under 163(j)(7)(B), and eligibility is

conditioned upon continuing to meet the eligibility requirements for each taxable year.

This revenue procedure clarifies that, if the taxpayer fails to satisfy the requirements to

be a qualified residential living facility in section 3.01 of this revenue procedure in a

subsequent taxable year, the residential living facility safe harbor no longer applies and

the taxpayer is deemed to have ceased the electing trade or business. This deemed

cessation of the electing trade or business does not apply to taxpayers that otherwise

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continue to qualify as an electing real property trade or business without the use of the

safe harbor. If, in a taxable year subsequent to the taxable year in which the taxpayer is

deemed to have ceased the electing trade or business the taxpayer again satisfies the

requirements in section 3.01 of this revenue procedure, the taxpayer’s initial election

pursuant to the residential living facility safe harbor will be automatically reinstated. See

§ 1.168(i)-4(d) and section 4.02 of Rev. Proc. 2019-08, 2019-03 I.R.B. 347 (January 14,

2019) for guidance on how to change the computation of depreciation for certain

property held by an electing real property trade or business.

.15 In light of the comments received in response to the 2018 proposed regulations

and to Notice 2020-59, this revenue procedure provides a safe harbor that allows a

taxpayer engaged in a trade or business that manages or operates a qualified

residential living facility, as defined in section 3.01 of this revenue procedure, to treat the

trade or business as a real property trade or business solely for purposes of qualifying

to make an election under section 163(j)(7)(B) to be an electing real property trade or

business (residential living facility safe harbor).

SECTION 3. DEFINITIONS FOR RESIDENTIAL LIVING FACILITY SAFE HARBOR

The following definitions apply for purposes of this revenue procedure:

.01 Qualified Residential Living Facility. Except as provided in sections 3.02 and

4.04 of this revenue procedure, a “qualified residential living facility” is a residential living

facility that:

(1) Consists of multiple rental dwelling units within one or more buildings or

structures that generally serve as primary residences on a permanent or semipermanent basis to individual customers or patients;

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(2) Provides supplemental assistive, nursing, or other routine medical services;

and

(3) Has an average period of customer or patient use of individual rental dwelling

units of 30 days or more.

.02 Section 168(e)(2)(A) test. A residential living facility that qualifies as residential

rental property under section 168(e)(2)(A) satisfies the requirements in section 3.01(1)

and (3) of this revenue procedure.

.03 Average period of customer or patient use.

(1) In general. The “average period of customer or patient use” is determined by

dividing: (i) the sum of the total number of days in the taxable year that each customer

or patient resides in a rental dwelling unit of the residential living facility, which may be

determined by reference to a rental contract or other formal written lease agreement, or

by the number of days paid for by Medicare or Medicaid; by (ii) the total number of

individual residential customers or patients that reside in all of the rental dwelling units

of the facility for the taxable year. For this purpose, a married couple residing in a single

rental dwelling unit of the residential living facility will be counted as one individual

customer or patient, unless each spouse is separately properly treated as an individual

customer or patient of the residential living facility that receives supplemental assistive,

nursing, or other routine medical services from or on behalf of the residential living

facility. Days in which a rental dwelling unit of a residential living facility are not

occupied are not included in the calculation of the average period of customer or patient

use.

(2) Example. Facility has 100 rental dwelling units. Of the 100 units, 60 units are

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occupied by the same customer or patient for the entire year, 25 other units are

occupied for 360 days of the year with each customer or patient occupying a unit for 90

days, and the remaining 15 units are occupied for a total of 10 months (March through

December = 306 days) of the year. Of the 15 units occupied for 10 months of the year,

10 units are occupied by customers or patients during the entire months of March

through July (153 days) and by different customers or patients during the entire months

of August through December (153 days), for a total of 20 customers for the 10-month

period. For the remaining 5 of the 15 units that are occupied for 10 months of the year,

5 customers or patients occupy the units for 8 months (May through December = 245

days) of the year, and 5 other customers or patients occupy the units for 2 months

(September and October = 61 days) of the year. The average period of customer or

patient use is determined by dividing the sum of the total number of days in the taxable

year that each customer resides in a rental dwelling unit, by the total number of

individual residential customers or patients that reside in all of the rental dwelling units

for the taxable year. The total number of days in the taxable year that the customers or

patients reside in the rental dwelling unit is 35,490 days [21,900 days (60 units that are

occupied for the entire year x 365 days per year) + 9,000 days (25 units that are

occupied for 90 days each x 90 days x 4 90-day periods) + 4,590 days (15 units that are

occupied for 10 months x 306 days)]. The total number of individual residential

customers or patients is 190 [60 customers or patients occupying a unit for the entire

year + 100 (25 customers or patients occupying units for 90 days each x 4 90-day

periods in a year) + 20 customers or patients that occupy a unit for a 5-month period + 5

customers or patients that occupy a unit for a 8-month period + 5 customers or patients

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that occupy a unit for a 2-month period]. Accordingly, the average period of customer or

patient use is approximately 187 days (35,490/190).

.04 Supplemental assistive, nursing, or other routine medical services.

“Supplemental assistive, nursing, or other routine medical services” are personal and

professional services that are customarily and routinely provided to individual residential

customers or patients of nursing homes, assisted living facilities, memory care

residences, continuing care retirement communities, skilled nursing facilities, or similar

facilities, as needed, on a day-to-day basis. Such services generally do not include

surgical, radiological, or other intensive or specialized medical services that are usually

provided only in emergency or short-term in-patient or out-patient hospital or surgical

settings.

.05 Permanent or semi-permanent basis. The rental dwelling units of a residential

living facility serve as primary residences on a “permanent or semi-permanent basis” to

customers or patients whose use of the units is generally long-term (30 days or more) in

nature, even though some customers or patients may arrive at the residential living

facility with significantly shortened life expectancies due to advanced age or terminal

medical conditions, and some customers or patients otherwise may be expected to

periodically reside away from the residential living facility, such as at the primary

residence of a spouse or other relative, for short periods of time.

SECTION 4. RESIDENTIAL LIVING FACILITY SAFE HARBOR

.01 Safe harbor for residential living facility trades or businesses. A taxpayer

engaged in a trade or business that manages or operates a qualified residential living

facility, as defined in section 3.01 of this revenue procedure, may treat such trade or

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business as a real property trade or business solely for purposes of the election under

section 163(j)(7)(B) to be an electing real property trade or business. Satisfying the

requirements of this safe harbor is not a determination that the taxpayer is engaged in a

real property trade or business under section 469.

.02 Effect of election and how to make the election. If a taxpayer relies on this safe

harbor in section 4.01 this revenue procedure to make the election under

section 163(j)(7)(B) to be an electing real property trade or business, the provisions in

§ 1.163(j)-9 apply, and the taxpayer must use the alternative depreciation system of

section 168(g) to depreciate the property described in section 168(g)(8). The taxpayer

makes the election under section 163(j)(7)(B) at the time, and in the manner prescribed

by § 1.163(j)-9(d). See also Rev. Proc. 2020-22.

.03 Substantiation. A trade or business that manages or operates a residential living

facility to which this revenue procedure applies must retain books and records to

substantiate that all the requirements of this section 4 have been met in accordance

with section 6001.

.04 Annual test; reinstated election. For any taxable year, subsequent to the taxable

year in which a taxpayer relies on the safe harbor in section 4.01 of this revenue

procedure to make the election under section 163(j)(7)(B) to be treated as a real

property trade or business, in which a taxpayer does not satisfy the requirements in

section 3.01 of this revenue procedure, the taxpayer is deemed to have ceased to

engage in the electing trade or business, as provided in § 1.163(j)-9(e) for such

subsequent taxable year. For any subsequent taxable year in which a taxpayer satisfies

the requirements in section 3.01 of this revenue procedure after a deemed cessation of

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the electing trade or business, the taxpayer’s initial election under section 163(j)(7)(B)

will be automatically reinstated.

.05 Anti-abuse. Taxpayers are not eligible to rely on the safe harbor in this revenue

procedure if a principal purpose of an arrangement or transaction is to avoid section

163(j) and its regulations and in a manner that is contrary to the purpose of this revenue

procedure. See §1.163(j)-2(j).

SECTION 5. APPLICABILITY

Taxpayers may apply the rules of this revenue procedure to taxable years beginning

after December 31, 2017.

SECTION 6. PAPERWORK REDUCTION ACT

.01 This revenue procedure does not impose any additional information collection

requirements in the form of reporting, recordkeeping requirements, or third-party

disclosure requirements to the burden that is accounted for in the final regulations.

However, this revenue procedure provides that qualified residential living facilities, as

defined in section 3.01 of this revenue procedure, may be treated as real property

trades or businesses, within the meaning of section 469(c)(7)(C), solely for purposes of

making the election under section 163(j)(7)(B) to qualify as an electing real property

trade or business. Taxpayers relying on the safe harbor in section 4.01 of this revenue

procedure must file a statement with their return under the procedures set forth in, and

containing the information required by, §1.163(j)-9 and Rev. Proc. 2020-22, if

applicable. That collection of information has been reviewed and approved by the

Office of Management and Budget in accordance with the Paperwork Reduction Act

(44 U.S.C. 3507) under control number 1545–0123.

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.02 This information is required to be collected and retained for compliance

purposes, namely, to determine whether the taxpayer has made an election for one of

its trades or businesses to be an electing real property trade or business.

.03 The Treasury Department and the IRS estimate that approximately 30,210

respondents are likely. This number was determined by examining, for the 2017 tax

year, Form 1120, Form 1120-S, Form 1065, and Form 1120-REIT filers with NAICS

codes of 623110 (nursing care facilities (skilled nursing facilities)), 623311 (continuing

care retirement communities), 623312 (assisted living facilities for the elderly) and

623990 (other residential care facilities) with gross receipts of at least $10 million.

.04 The estimated number of respondents is 30,210. The estimated annual burden

per respondent/recordkeeper varies from 0 to 30 minutes, depending on individual

circumstances, with an estimated average of 15 minutes. The estimated total annual

reporting and/or recordkeeping burden is 7,552.5 hours (30,210 respondents x 15

minutes). The estimated annual cost burden to respondents is $95 per hour.

Accordingly, we expect the total annual cost burden for the election statements to be

$717,487.50 (30,210 * .25 * $95). The estimated annual frequency of responses is

once because the statements only have to be filed once.

SECTION 7. DRAFTING INFORMATION

The principal authors of this revenue procedure are Susie Bird, Charles Gorham,

Justin Grill, Bernard Harvey and Jaime Park of the Office of Associate Chief Counsel

(Income Tax & Accounting) and Adrienne Mikolashek and William Kostak of the Office

of Associate Chief Counsel (Passthroughs and Special Industries). For further

information regarding this revenue procedure, contact Mr. Grill at (202) 317-7003, or Mr.

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Kostak at (202) 317-5279 (not toll-free calls).