IRS Grants Extension for Late § 163(j)(7)(B) Real Property Trade or Business Election

IRS Grants Relief for Overlooked Real Property Election: A $5M+ Tax Mistake Averted

A taxpayer narrowly avoided a multimillion-dollar tax liability when the IRS granted a 60-day extension to file a late election to treat its business as a real property trade or business (RPTOB). The taxpayer’s certified public accounting firm failed to inform it of the availability of the § 163(j)(7)(B) RPTOB election despite having all necessary information, nearly costing the business millions in lost business interest deductions. The IRS ruled that the taxpayer acted reasonably and in good faith by relying on professional advice, granting relief under § 301.9100-3 to file the election retroactively.

The Question: Can a Taxpayer Fix a Missed § 163(j)(7)(B) Election?

A real estate partnership filed its Year 2 tax return without making the § 163(j)(7)(B) election to treat itself as a real property trade or business (RPTOB), despite the CPA firm preparing the return having all necessary information to make the election. Section 163(j) limits the deduction of business interest expense to 30% of adjusted taxable income (ATI), adjusted for EBITDA through 2021 and EBIT thereafter. However, § 163(j)(7)(B) allows qualifying real property trades or businesses to elect out of this limitation entirely. The taxpayer, unaware of the election’s availability, relied on its CPA firm to prepare the return and provide necessary tax planning advice. The firm failed to inform the taxpayer of the election opportunity, nearly costing the business millions in lost business interest deductions. The taxpayer sought IRS guidance on whether it could retroactively make the election to avoid the § 163(j) limitation.

The Facts: How a CPA Firm’s Oversight Cost Taxpayer Millions

The taxpayer, a partnership operating real estate development and leasing projects, qualified as a real property trade or business (RPTOB) under § 469(c)(7)(C)—a classification allowing businesses primarily engaged in real estate activities to elect out of the § 163(j) business interest deduction limitation. The taxpayer retained an international CPA firm to prepare its Year 2 tax return, providing all necessary financial and operational details, including documentation of its real estate activities.

Despite the taxpayer’s eligibility, the CPA firm failed to inform it of the § 163(j)(7)(B) election, which would have allowed the taxpayer to bypass the 30% cap on deductible business interest imposed by § 163(j). The firm had previously offered the same election to a related entity but did not extend the same consideration to the taxpayer. The oversight went unnoticed until Year 3, when the taxpayer switched accounting firms and the new firm identified the missed opportunity during a routine review of the Year 2 return. The CPA firm later acknowledged its failure to advise the taxpayer of the election’s availability, confirming that the taxpayer was unaware of the option entirely.

The Ruling: IRS Grants 60-Day Extension Under § 301.9100-3 Relief

The IRS granted the taxpayer a 60-day extension to file the § 163(j)(7)(B) real property trade or business (RPTOB) election under § 301.9100-3, which permits discretionary relief for late regulatory elections. Section 301.9100-3 allows the Commissioner to extend deadlines for elections where the taxpayer acted reasonably and in good faith, and granting relief would not prejudice the government’s interests.

The IRS concluded the taxpayer met these conditions. The taxpayer reasonably relied on a qualified tax professional—the CPA firm—which failed to advise the taxpayer of the RPTOB election’s availability despite having all necessary information. The taxpayer submitted the relief request before the IRS discovered the error, demonstrating no intent to exploit hindsight. Additionally, the tax year at issue remains open, so granting relief would not reduce the government’s tax collection in the aggregate.

Under § 301.9100-3(b)(1)(v), a taxpayer is deemed to have acted reasonably and in good faith when relying on a qualified tax professional who failed to make or advise the election. The IRS found the taxpayer’s reliance on the CPA firm was reasonable, as the firm acknowledged its oversight and the taxpayer had no independent knowledge of the election’s availability. The government’s interests were not prejudiced because the election would not alter the taxpayer’s aggregate tax liability, and the statute of limitations on assessment for Year 2 remains open.

The IRS granted a 60-day extension from the date of the ruling to file the election statement in accordance with § 1.163(j)-9(d), allowing the taxpayer to retroactively elect RPTOB status for Year 2.

The Rationale: Why the IRS Said Yes to Late Election Relief

The IRS granted relief under § 301.9100-3 because the taxpayer met the disjunctive benchmarks for reasonable and good-faith action. Specifically, the taxpayer satisfied § 301.9100-3(b)(1)(v), demonstrating reasonable reliance on the CPA firm’s failure to advise of the § 163(j)(7)(B) election. The CPA firm, a qualified tax professional, prepared the Year 2 return and possessed all necessary facts to determine the election’s availability, yet failed to inform the taxpayer. This reliance was deemed reasonable because the taxpayer had no independent knowledge of the election’s existence and no reason to suspect the CPA’s oversight.

The IRS also noted that the taxpayer submitted the relief request before the IRS discovered the error, satisfying § 301.9100-3(b)(1)(i). No accuracy-related penalty under § 6662 had been assessed, and the taxpayer did not make an informed choice to forgo the election, eliminating concerns under § 301.9100-3(b)(3). Finally, the government’s interests were not prejudiced because the election would not alter the taxpayer’s aggregate tax liability, and the statute of limitations on assessment for Year 2 remains open.

Implications: What This PLR Means for Real Estate Taxpayers and Advisors

The IRS’s willingness to grant relief under § 301.9100-3 in this case underscores a critical lesson for taxpayers and advisors: missed elections are not necessarily fatal if documented properly. Taxpayers should verify that their tax professionals explicitly inform them of all available elections—especially for complex provisions like § 163(j)(7)(B)—to avoid costly oversights. The IRS’s decision here hinged on the taxpayer’s reasonable reliance on a CPA firm’s oversight and the absence of prejudice to the government, demonstrating that reasonable cause can extend to professional error if the taxpayer acted in good faith.

This PLR is non-precedential, but it signals the IRS’s openness to granting relief in similar cases where taxpayers submit requests before the error is discovered and can show no intentional avoidance of tax obligations. Advisors should treat this as a cautionary tale: while relief is possible, it is not guaranteed, and the burden of proof lies with the taxpayer. The IRS’s requirement to attach the PLR—or its control number—to the tax return (or include it in electronic filings) ensures transparency but adds administrative complexity.

A key takeaway for real estate taxpayers is the mandatory application of the alternative depreciation system (§ 168(g)(1)(F)) if they elect out of § 163(j). This means longer recovery periods for real property, reducing near-term deductions but preserving interest deductibility. Advisors must weigh the trade-offs carefully, as the RPTOB election’s benefits may be offset by ADS’s slower depreciation. Finally, taxpayers should document all interactions with tax professionals regarding elections to strengthen future relief requests under § 301.9100-3.