DEPRECIATION OF REAL ESTATE.

SEC. 521. DEPRECIATION OF REAL ESTATE. (a) Section 1250 Property and Rehabilitation Property.—Section 167 (relating to depreciation) is amended by redesignating subsection (j) as subsection (m), and by inserting after subsection (i) the following new subsections: “(j) Special Rules for Section 1250 Property.— “(1) General rule.—Except as provided in paragraphs (2) and (3), in the case of section 1250 property, subsection (b) shall not apply and the term ‘reasonable allowance’ as used in subsection (a) shall include an allowance computed in accordance with regulations prescribed by the Secretary or his delegate, under any of the following methods: “(A) the straight line method, “(B) the declining balance method, using a rate not exceeding 150 percent of the rate which would have been used had the annual allowance been computed under the method described in subparagraph (A), or “(C) any other consistent method productive of an annual allowance which, when added to all allowances for the period commencing with the taxpayer’s use of the property and including the taxable year, does not, during the first two-thirds of the useful life of the property, exceed the total of such allowances which would have been used had such allowances been computed under the method described in subparagraph (B). Nothing in this paragraph shall be construed to limit or reduce an allowance otherwise allowable under subsection (a) except where allowable solely by reason of paragraph (2), (3), or (4) of subsection (b). “(2) Residential Rental Property.— “(A) In general.—Paragraph (1) of this subsection shall not apply, and subsection (b) shall apply in any taxable year, to a building or structure— “(i) which is residential rental property located within the United States or any of its possessions, or located within a foreign country if a method of depreciation for such property comparable to the method provided in subsection (b) (2) or (3) is provided by the laws of such country, and “(ii) the original use of which commences with the taxpayer. In the case of residential rental property located within a foreign country, the original use of which commences with the taxpayer, if the allowance for depreciation provided under the laws of such country for such property is greater than that provided under paragraph (1) of this subsection, but less than that provided under subsection (b), the allowance for depreciation under subsection (b) shall be limited to the amount provided under the laws of such country. “(B) Definition.—For purposes of subparagraph (A), a building or structure shall be considered to be residential rental property for any taxable year only if 80 percent or more of the gross rental income from such building or structure for such year is rental income from dwelling units (within the meaning of subsection (k)(3)(C)). For purposes of the preceding sentence, if any portion of such building or structure is occupied by the taxpayer, the gross rental 83 Stat. 650 income from such building or structure shall include the rental value of the portion so occupied. “(C) Change in method of depreciation.—Any change in the computation of the allowance for depreciation for any taxable year, permitted or required by reason of the application of subparagraph (A), shall not be considered a change in a method of accounting. “(3) Property constructed, etc., before july 25, 1969.—Paragraph (1) of this subsection shall not apply, and subsection (b) shall apply, in the case of property— “(A) the construction, reconstruction, or erection of which was begun before July 25, 1969, or “(B) for which a written contract entered into before July 25, 1969, with respect to any part of the construction, reconstruction, or erection or for the permanent financing thereof, was on July 25, 1969, and at all times thereafter, binding on the taxpayer. “(4) Used section 1250 property.—Except as provided in paragraph (5), in the case of section 1250 property acquired after July 24, 1969, the original use of which does not commence with the taxpayer, the allowance for depreciation under this section shall be limited to an amount computed under— “(A) the straight line method, or “(B) any other method determined by the Secretary or his delegate to result in a reasonable allowance under subsection (a), not including— “(i) any declining balance method, “(ii) the sum of the years-digits method, or “(iii) any other method allowable solely by reason of the application of subsection (b)(4) or paragraph (1)(C) of this subsection. “(5) Used residential rental property.—In the case of section 1250 property which is residential rental property (as defined in paragraph (2)(B)) acquired after July 24, 1969, having a useful life of 20 years or more, the original use of which does not commence with the taxpayer, the allowance for depreciation under this section shall be limited to an amount computed under— “(A) the straight line method, “(B) the declining balance method, using a rate not exceeding 125 percent of the rate which would have been used had the annual allowance been computed under the method described in subparagraph (A), or “(C) any other method determined by the Secretary or his delegate to result in a reasonable allowance under subsection (a), not including— “(i) the sum of the years-digits method, “(ii) any declining balance method using a rate in excess of the rate permitted under subparagraph (B), or “(iii) any other method allowable solely by reason of the application of subsection (b)(4) or paragraph (1)(C) of this subsection. “(6) Special rules.— “(A) Under regulations prescribed by the Secretary or his delegate, rules similar to the rules provided in paragraphs (5), (9), (10), and (13) of section 48(h) shall be applied for purposes of paragraphs (3), (4), and (5) of this subsection. 83 Stat. 651 “(B) For purposes of paragraphs (2), (4), and (5), if section 1250 property which is not property described in subsection (a) when its original use commences, becomes property described in subsection (a) after July 24, 1969, such property shall not be treated as property the original use of which commences with the taxpayer. “(C) Paragraphs (4) and (5) shall not apply in the case of section 1250 property acquired after July 24, 1969, pursuant to a written contract for the acquisition of such property or for the permanent financing thereof, which was, on July 24, 1969, and at all times thereafter, binding on the taxpayer. “(k) Depreciation of Expenditures To Rehabilitate Low-Income Rental Housing.— “(1) 60-month rule.—The taxpayer may elect, in accordance with regulations prescribed by the Secretary or his delegate, to compute the depreciation deduction provided by subsection (a) attributable to rehabilitation expenditures incurred with respect to low-income rental housing after July 24, 1969, and before January 1, 1975, under the straight line method using a useful life of 60 months and no salvage value. Such method shall be in lieu of any other method of computing the depreciation deduction under subsection (a), and in lieu of any deduction for amortization, for such expenditures. “(2) Limitations.— “(A) The aggregate amount of rehabilitation expenditures paid or incurred by the taxpayer with respect to any dwelling unit in any low-income rental housing which may be taken into account under paragraph (1) shall not exceed $15,000. “(B) Rehabilitation expenditures paid or incurred by the taxpayer in any taxable year with respect to any dwelling unit in any low-income rental housing shall be taken into account under paragraph (1) only if over a period of two consecutive years, including the taxable year, the aggregate amount of such expenditures exceeds $3,000. “(3) Definitions.—For purposes of this subsection— “(A) Rehabilitation expenditures.—The term ‘rehabilitation expenditures’ means amounts chargeable to capital account and incurred for property or additions or improvements to property (or related facilities) with a useful life of 5 years or more, in connection with the rehabilitation of an existing building for low-income rental housing; but such term does not include the cost of acquisition of such building or any interest therein. “(B) Low-income rental housing.—The term ‘low-income rental housing’ means any building the dwelling units in which are held for occupancy on a rental basis by families and individuals of low or moderate income, as determined by the Secretary or his delegate in a manner consistent with the policies of the Housing and Urban Development Act of 1968 pursuant to regulations prescribed under this subsection. “(C) Dwelling unit.—The term ‘dwelling unit’ means a house or an apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, inn, or other establishment more than one-half of the units in which are used on a transient basis.” 83 Stat. 652 (b) Recapture of Additional Depreciation.—Section 1250(a) (relating to gain from dispositions of certain depreciable realty) is amended to read as follows: “(a) General Rule.—Except as otherwise provided in this section— “(1) Additional depreciation after december 31, 1969.—If section 1250 property is disposed of after December 31, 1969, the applicable percentage of the lower of— “(A) that portion of the additional depreciation (as defined in subsection (b)(1) or (4)) attributable to periods after December 31, 1969, in respect of the property, or “(B) the excess of— “(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over “(ii) the adjusted basis of such property, shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. Such gain shall be recognized notwithstanding any other provision of this subtitle. “(C) Applicable percentage.—For purposes of paragraph (1), the term ‘applicable percentage’ means— “(i) in the case of section 1250 property disposed of pursuant to a written contract which was, on July 24, 1969, and at all times thereafter, binding on the owner of the property, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months; “(ii) in the case of section 1250 property constructed, reconstructed, or acquired by the taxpayer before January 1, 1975, with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing is financed or assisted by direct loan or tax abatement under similar provisions of State or local laws, and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B), 100 percent minus one percentage point for each full month the property was held after the date the property was held 20 full months; “(iii) in the case of residential rental property (as defined in section 167(j)(2)(B)) other than that covered by clauses (i) and (ii), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; “(iv) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; and “(v) in the case of all other section 1250 property, 100 percent. Clauses (i), (ii), and (iii) shall not apply with respect to the additional depreciation described in subsection (b)(4). “(2) Additional depreciation before january 1, 1970.— “(A) In general.—If section 1250 property is disposed of after December 31, 1963, and the amount determined under 83 Stat. 653 paragraph (1)(B) exceeds the amount determined under paragraph (1)(A), then the applicable percentage of the lower of— “(i) that portion of the additional depreciation attributable to periods before January 1, 1970, in respect of the property, or “(ii) the excess of the amount determined under paragraph (1)(B) over the amount determined under paragraph (1)(A), shall also be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. Such gain shall be recognized notwithstanding any other provision of this subtitle. “(B) Applicable percentage.—For purposes of subparagraph (A) the term ‘applicable percentage’ means 100 percent minus 1 percentage point for each full month the property was held after the date on which the property was held for 20 full months.” (c) Additional Depreciation.—Section 1250(b) (relating to definition of additional depreciation) is amended by adding at the end thereof the following new paragraph: “(4) Additional depreciation attributable to rehabilitation expenditures.—The term ‘additional depreciation’ also means, in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), the depreciation adjustments allowed under such section to the extent attributable to such property, except that, in the case of such property held for more than one year after the rehabilitation expenditures so allowed were incurred, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined under the straight line method of adjustment without regard to the useful life permitted under section 167(k).” (d) Change in Method of Computing Depreciation.—Section 167(e) (relating to depreciation) is amended by adding at the end thereof the following new paragraph: “(3) Change with respect to section 1250 property.—A taxpayer may, on or before the last day prescribed by law (including extensions thereof) for filing his return for his first taxable year beginning after July 24, 1969, and in such manner as the Secretary or his delegate shall by regulation prescribe, elect to change his method of depreciation in respect of section 1250 property (as defined in section 1250(c)) from any declining balance or sum of the years-digits method to the straight line method. An election may be made under this paragraph notwithstanding any provision to the contrary in an agreement under subsection (d).” (e) Technical and Conforming Changes.— (1) Subsection (d) of section 1250 is amended by striking out “subsection (a)(1)” wherever it appears and inserting in lieu thereof “subsection (a)”. (2) Subsection (f) of section 1250 is amended— (A) by striking out “subsection (a)(1)” in paragraph (1) and inserting in lieu thereof “subsection (a)”, and 83 Stat. 654 (B) by striking out paragraph (2) thereof and inserting in lieu thereof the following: “(2) Ordinary income attributable to an element.—For purposes of paragraph (1), the amount taken into account for any element shall be the sum of— “(A) the amount (if any) determined by multiplying— “(i) the amount which bears the same ratio to the lower of the amounts specified in subparagraph (A) or (B) of subsection (a)(1) for the section 1250 property as the additional depreciation for such element attributable to periods after December 31, 1969, bears to the sum of the additional depreciation for all elements attributable to periods after December 31, 1969, by “(ii) the applicable percentage for such element, and “(B) the amount (if any) determined by multiplying— “(i) the amount which bears the same ratio to the lower of the amounts specified in subsection (a)(2)(A)(i) or (ii) for the section 1250 property as the additional depreciation for such element attributable to periods before January 1, 1970, bears to the sum of the additional depreciation for all elements attributable to periods before January 1, 1970, by “(ii) the applicable percentage for such element. For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property.” (f) Carryovers in Certain Corporate Acquisitions.—Section 381(c)(6) (relating to method of computing depreciation allowance) is amended to read as follows: “(6) Method of computing depreciation allowance.—The acquiring corporation shall be treated as the distributor or transferor corporation for purposes of computing the depreciation allowance under subsections (b), (j), and (k) of section 167 on property acquired in a distribution or transfer with respect to so much of the basis in the hands of the acquiring corporation as does not exceed the adjusted basis in the hands of the distributor or transferor corporation.” (g) Effective Date.—The amendments made by this section shall apply with respect to taxable years ending after July 24, 1969.