The nursing home interest deduction landscape changed significantly when Treasury released final Section 163(j) regulations and Notice 2020-59 on July 28, 2020. These rules opened a path for long-term care facilities under Section 163(j) of the Internal Revenue Code, allowing qualifying nursing home property companies to elect out of the business interest expense limitation. For an industry already managing thin margins and complex ownership structures, this carve-out represented a meaningful tax planning opportunity. This article answers the central question facing operators and their advisors: how can a nursing home property company fully deduct its interest expense under the 163(j) rules?
What is the Section 163(j) interest expense limitation?
Section 163(j) of the Internal Revenue Code, enacted as part of the Tax Cuts and Jobs Act (TCJA), limits the amount of business interest a company can deduct in a given tax year. Specifically, the deduction is capped at 30% of adjusted taxable income, which is roughly equivalent to EBITDA (earnings before interest, taxes, depreciation, and amortization). The full statutory text is published by the IRS.
This interest expense limitation applies broadly across industries and entity types. The CARES Act temporarily increased the threshold to 50% for certain taxpayers, covering non-partnership entities in 2019 and all taxpayers in 2020, but the underlying rule remains a significant constraint for capital-intensive businesses that carry substantial debt.
For nursing homes and other real estate-heavy operations, where mortgage interest is often one of the largest line items on a tax return, the limitation created a real financial burden. Without relief, many facilities would have lost the ability to fully deduct their interest costs, resulting in higher taxable income and increased tax liability. Operators in the skilled nursing and long-term care sector were particularly exposed because of how their financing is structured.
How the real estate election works, and why it was blocked
Congress included a safety valve in Section 163(j): companies conducting a real estate trade or business can elect out of the 30% interest deduction limitation entirely. In exchange, the electing company must use the Alternative Depreciation System (ADS) for its real property, which generally slows down depreciation deductions by extending the recovery period.
This real estate election was designed to give property-intensive businesses a choice: accept the interest expense limitation with faster depreciation, or deduct all interest without restriction but depreciate assets more slowly.
The proposed regulations issued by the IRS in late 2018 introduced a complication that hit the nursing home industry particularly hard. Under the proposed rules, a real estate property company (commonly called “Propco”) that leases to a related-party operating company (“Opco”) was prohibited from making the real estate election. This Propco-Opco structure is common in skilled nursing and long-term care, where the property-owning entity and the facility operator are often related but legally separate companies.
The prohibition meant that nursing home Propcos were locked into the 30% interest deduction cap with no way to elect out, a result that industry leaders described as potentially severe for facilities already operating on narrow margins.
Treasury’s special carve-out for long-term care facilities
On July 28, 2020, Treasury released its final Section 163(j) regulations alongside Notice 2020-59. While the final regulations did not change the general rule prohibiting related-party Propcos from making the real estate election, Notice 2020-59 contained a proposed revenue procedure that offered a safe harbor for long-term care facilities, and taxpayers were permitted to rely on it immediately.
Under the proposed safe harbor, a trade or business that manages or operates a qualified residential living facility could treat that activity as a real property trade or business for purposes of the Section 163(j) election. To qualify, the facility had to consist of multiple rental dwelling units serving as primary residences on a permanent or semi-permanent basis, provide supplemental assistive, nursing, or routine medical services, and have an average period of customer use of 90 days or more. That 90-day threshold effectively captured most skilled nursing facilities, assisted living communities, and other residential care operations where residents live on-site for extended periods.
The IRS later finalized this guidance in Revenue Procedure 2021-9, issued in early 2021, which broadened the safe harbor and reduced the average-use requirement from 90 days to 30 days. The result was a direct response to uncertainty raised by the long-term care industry, and Treasury acknowledged the unique nature of these facilities in its explanation, a notable sign that regulators understood the ownership structures at play.
What this means for facilities that did not file the election
Many nursing home operators and their tax advisors had been counseled not to file the real estate election under the proposed regulations, since the Propco-Opco prohibition appeared to make it unavailable. As a result, some facilities reported higher taxable income than necessary for the 2018, 2019, and 2020 tax years.
The guidance addressed this directly. Through Revenue Procedure 2020-22, Treasury allowed qualifying taxpayers to make a late real property trade or business election, or to withdraw a prior election, for tax years beginning in 2018, 2019, and 2020, generally by filing amended returns. This meant facilities that previously accepted the interest expense limitation could go back, elect out, and claim refunds for excess taxes paid, subject to the deadlines set out in that revenue procedure.
For operators who missed this window or were unaware of the change, working with a tax advisor familiar with long-term care facility tax rules is essential. Pease Bell’s tax advisory services can model the trade-off between full interest deductibility and the slower ADS depreciation schedule, which requires careful calculation before any amended return is filed.
The triple net lease exception: another path to full deductibility
The final regulations also acknowledged an additional avenue for certain nursing home property companies. Treasury recognized that a triple net lease arrangement, where the tenant pays property taxes, insurance, and maintenance in addition to rent, might not rise to the level of a “trade or business” for Section 163(j) purposes.
If a Propco’s leasing activity does not constitute a trade or business, then the business interest deduction limitation does not apply at all. The Propco would not need to file the real estate election because the restriction simply would not reach its interest expenses.
The regulations did not provide specific criteria for determining when a triple net lease crosses the trade-or-business threshold, leaving some ambiguity. They did confirm that a company engaged in triple net leasing activities can voluntarily file the real estate election if it chooses.
This creates a practical planning opportunity. For property acquired before September 27, 2017, an operator might take the position that a triple net lease is not a trade or business and therefore falls outside Section 163(j) entirely. For property acquired after that date, filing the election may be the safer approach. Since the election is made on a company-by-company basis, using different strategies for different entities is permissible and not considered inconsistent.
Key takeaways for nursing home operators and advisors
The Treasury’s final Section 163(j) regulations and Notice 2020-59 delivered several important outcomes for the skilled nursing and long-term care industry:
- Operators of qualified residential living facilities with an average resident stay of 90 days or more under the original safe harbor (reduced to 30 days under Revenue Procedure 2021-9) can treat the activity as a real property trade or business and elect out of the interest expense limitation.
- Facilities that did not previously file the election can make a late election and amend 2018 through 2020 returns under Revenue Procedure 2020-22.
- Triple net lease structures may fall entirely outside the Section 163(j) framework, offering another route to full interest deductibility.
- The election is made entity by entity, allowing operators to adopt different strategies across their portfolios.
For any organization operating in the long-term care space, reviewing existing tax positions in light of these rules is a high-priority step. The potential for amended returns and refunds makes this one of the more actionable regulatory changes in recent years.
Frequently Asked Questions
What is the Section 163(j) interest deduction limitation?
Section 163(j) limits the amount of business interest a company can deduct each year to 30% of its adjusted taxable income (roughly EBITDA). It was enacted as part of the TCJA in 2017 and applies broadly to businesses across all industries, including nursing homes and long-term care facilities.
Can nursing home property companies elect out of the interest limitation?
Yes. Under the safe harbor first proposed in Notice 2020-59 and finalized in Revenue Procedure 2021-9, a trade or business that operates a qualified residential living facility can be treated as a real property trade or business and elect out. The original average-use threshold was 90 days or more; the finalized procedure reduced it to 30 days. Electing allows the property company to deduct all of its interest expense without the 30% cap, in exchange for using slower ADS depreciation.
What is the Propco-Opco structure in nursing home ownership?
A Propco-Opco structure separates the real estate (owned by the Propco) from the facility operations (run by the Opco). The two entities are typically related parties. This structure is standard in skilled nursing and long-term care for liability management and financing purposes.
Can facilities amend prior tax returns to claim the election?
Yes. Revenue Procedure 2020-22 allows qualifying taxpayers to make a late real property trade or business election, or withdraw a prior election, for tax years beginning in 2018, 2019, and 2020, generally through amended returns. Facilities that reported higher income because they were advised not to elect can file amended returns to claim refunds, subject to the deadlines in that procedure.
Does the interest limitation apply to triple net leases?
It may not. Treasury’s final regulations acknowledge that a triple net lease arrangement might not constitute a trade or business under Section 163(j). If the leasing activity falls below that threshold, the interest deduction limitation does not apply and no election is needed.
How does the CARES Act affect the Section 163(j) limitation for nursing homes?
The CARES Act temporarily raised the interest deduction cap from 30% to 50% of adjusted taxable income. This increase applied to non-partnership entities for 2019 and to all taxpayers for 2020, providing additional short-term relief for nursing home operators carrying significant debt.
