Excess Business Interest Expense 163(j)

[Tzvi Nussbaum]

I recently reviewed my tax return for 2018 prepared by my CPA and noticed that the amount deducted this year for depreciation was significantly less than years prior.  He used the Excess Business Interest Expense form 163(j).  The losses are significantly diminished as a result.  Does this apply to passive investors, active investors, or both?  Is this affected by taking bonus depreciation?  My wife is classified as an active real estate investor while I am passive.  Does anyone have any insight to this?

[Brandon Hall]

Are you running, or investing in, a tax shelter? A tax shelter occurs when an entity shares more than 35% of its losses with LPs. Tax shelters are subject to the business interest limitations.

Real property trades or businesses can elect out of the limitations by attaching an election statement under IRC Sec 163(j)(7)(B) to the return. This will allow you to avoid the limits on business interest but you have to use ADS depreciation on your residential real property assets (30 years straight line versus 27.5 years).