GO Zone Update and Tax Incentives Explained
March 9, 2010
With Tax season right around the corner, I am sure that on everyone’s mind is the topic of getting every (legal) tax benefit that they can get. We thought it was appropriate given the season to overview the GO Zone benefits and update everyone on what they can do to take advantage of this offer from the IRS.
GO ZONE EXTENSION UNTIL 12/31/2010
As you may already know, the IRS extended the benefits of the GO Zone out until the end of this year. That’s the good news. There are a few items you need to be well aware of before breaking out your checkbook to purchase properties.
#1: LOCATION, LOCATION, LOCATION!
When the GO Zone extension took place, the IRS ONLY extended benefits in certain areas of the original GO Zone. This includes certain areas of Mississippi and Louisiana, but NOT Alabama (AL GO Zone benefits ended back in 2008). Mississippi Counties where you can still purchase GO Zone properties and receive benefits are Harrison, River, Hancock, Stone, and Jackson Counties.
So, as an example, if a newly built single family home in Gulfport Mississippi was purchased in December 2009 and was put into rental service in February 2010, it would qualify with the extension since Gulfport is in Harrison County, MS.
#2: IT’S ALL ABOUT TIMING
There is one more very important items that you need to be aware of with the GO Zone extension that has to do with the way the IRS Code is written. The short story* is that according to the IRS, you will only get Bonus Depreciation benefits on the portion of the home that was completed ON OR BEFORE December 31st, 2009.
* If you want the “long version” of the story that digs into the depths of the IRS code, drink some coffee, click “here“, and then scroll down towards the bottom of the article.
Confused yet? Let’s look at a real example. Supposed you had a new home built and completed in 2009 in Gulfport, MS.
Purchase Price: $119,000
Land: $20,000
Total Construction: $99,000
Bonus Depreciation: $49,500
Since the construction was completed before the IRS deadline, then the bonus appreciation available to you is $49,500.
Let’s consider another example. Suppose that someone was offering the following Duplex in Ocean Springs, MS (Ocean Springs is in Jackson County). However, the unit was not started until after January 1st, 2010.
Purchase Price: $198,000
Land: $20,000
Total Construction: $178,000
Bonus Depreciation: $0
Note there was no portion of the construction completed before the IRS deadline, there is absolutely no GO Zone benefits for this Duplex purchase.
AM I TOO LATE?
Good new is that there are still some quality GO Zone Single Family properties out there. The bad news is that given the IRS deadlines imposed in the extension, finding not only qualified properties, but also properties that make sense are becoming harder and harder to find. So to answer the above question, NO - you are not too late. There are still some prime quality properties out there for you to take advantage of (i.e. reduction of your tax liabilities through GO Zone benefits). You just need to know what to look for and where to look.
WHERE DO I LOOK?
We are constantly on the look out for quality homes that make purchasing sense in the GO Zone. If you are interested in receiving details once they come in, simply click here to e-mail me.
GO Zone Extensions, Deadlines, & Tax Benefits Simplified
June 5, 2009
NOTE: Did You See Yesterday’s Email About A Model Home Opportunity? (Click To Read)
With the taste of Summer now in the air and with Tax season still fresh on everyone’s mind, I have been receiving a lot of questions from real estate investors who are looking for clarifications on the GO Zone time lines. “So when exactly do the benefits end?” is the most common question that I have been receiving and more so as we approach mid-year.
GO ZONE EXTENSION
As you may already know, the IRS put an extension in place that extended the benefits of the GO Zone out until 2010. The catch? Well first of all, the extension ONLY extended the tax benefits of the GO Zone in certain areas. In certain locations in Mississippi and Louisiana, you can still claim bonus depreciation benefits through 2010.
In Mississippi, the eligible counties are:
- Harrison County;
- River County;
- Hancock County;
- Stone County; and
- Jackson County.
For Louisiana, the list of parishes include:
- Orleans;
- Cameron;
- Plaquemines;
- Calcasieu;
- St. Bernard; and
- St. Tammany.
Note that in Alabama, the GO Zone bonus depreciation and GO Zone benefits 
are no longer available and already ended back in 2008.
CONFUSION AND CALRIFICATION
Ok, so here is where all the fun starts. This is the point where I usually get asked “So Michael, if the benefits are extended in (as an example) Gulfport Mississippi until 2010, I have plenty of time, right?”
In short…NO! The reason for this answer lies in the depths and details of the IRS Code. I’ll give you both the long and short versions. For those who can’t wait to read the long answer, I will give you the short version first.
THE SHORT VERSION
Basically (following the above example), as long as you put a new unit into rental service by the end of 2010 in Gulfport Mississippi then you will be able to claim GO Zone benefits. HOWEVER, you will only be able to have the Bonus Depreciation on that portion of the structure that was completed ON OR BEFORE December 31st, 2009. So if the new home construction was just started and only the foundation was completed by the end of 2009, you would only be able to use that portion of the structure (since you can not depreciate land) that was completed by the end of 2009 for your Bonus depreciation calculation. In this example, you would only be able to count amount for the foundation in your bonus depreciation calculation.
So here’s an example. Suppose that you are purchasing new home construction. Specifically, a brick exterior 3/2 1300 s.f. single family home in the Gulfport MS area for say $140,000. In this example the land is estimated at $20,000. The first thing that you want to do is calculate the max Bonus Depreciation which you do by first subtracting the value of the land and then take 50% of that.
Purchase Price: $140,000
Land: $20,000
Total Construction: $120,000
Bonus Depreciation: $60,000
If this home was purchased and completed before the end of 2009, then that is exactly what would be on the table; a $60,000 bonus depreciation.
If you did not know the “details of the IRS code” and purchased the same exact home in December (ASSUMING that you would be able to get the same price), then what you could get as a benefit depends on what is completed on the home. Realistically, if you waited until early December to purchase, you would be lucky to have the foundation completed by the end of the year (given permitting, etc.).
Completed Construction: $12,000
Bonus Depreciation: $6,000
As you can see, a big difference in savings.
THE LONG VERSION
For those of you who still want proof that the GO Zone benefits are as described above, let’s look at the long version of the answer. This requires that we dive into the source of the GO Zone benefits - the Internal Revenue Service. The following link takes you to the IRS Notice 2007-36 entitled “GO Zone Bonus Depreciation Additional Guidance”
http://www.irs.gov/irb/2007-17_IRB/ar12.html
From the above source:
“.02 Determination of Adjusted Basis Qualifying for the GO Zone Additional First Year Depreciation Deduction.
(1) Property described in § 1400N(d)(6)(B)(ii)(I) and section 4.01(4)(a) of this notice.
(a) In general. In the case of GO Zone extension property described in § 1400N(d)(6)(B)(ii)(I) and section 4.01(4)(a) of this notice (GO Zone extension real property), § 1400N(d)(6)(D) provides that the GO Zone additional first year depreciation deduction is available only for the adjusted basis of such property attributable to manufacture, construction, or production before January 1, 2010.”
WHAT THE SMART INVESTORS ARE DOING
Working with lots of real estate investors, I can see what the seasoned investors are doing:
- They are making sure that to maximize their GO Zone benefits and Bonus Depreciation that the homes will be completed before the end of 2009;
- They are also planning ahead of the “end of the year” rush (will be more so this year give the above time lines) and purchasing early while the quality “deals” are still available;
- Along the same lines, they realize what the builders know. That is that the end of the year will bring higher demands and this will facilitate higher prices to get the same tax benefits. Thus, by purchasing early ahead of the crowds, they not only get a better selection of product to choose from, but also are purchasing at lower prices as well.
CONCLUSION
While the IRS has granted and extension of the GO Zone benefits, they have caused a bit of confusion as to the best way to maximize these benefits for real estate investors. The bottom line is that if the construction portion of the home is completed by the end of 2009 you will be able to maximize your benefits. For the smart investor who thinks ahead of the crowd, this means getting into contract early for new constriction to not only ensure completion on time, but also to ensure getting in at great pricing as well.
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New Appraisal Rules and Regulations
May 4, 2009
If you have not already heard, as of Friday May 1st 2009, as one industry expert put it, “the complete lending landscape just changed!” To bring that back in from a more macroscopic statement, the way that appraisal are performed for certain types of real estate has changed. Welcome to the new world “after: the introduction of the Home Valuation Code of Conduct (HVCC). The HVCC pertains to mortgage loans (originated from May 1st onward) that are intended for sale to either Fannie Mae or Freddie Mac.
SO REMIND ME AGAIN ABOUT THE HVCC?
Last week’s article went over the Good, Bad and the Ugly of the Home Valuation Code of Conduct, and before I continue I wanted to remind folks of a few things about the HVCC.
According to the Federal Housing Finance Agency (FHFA), the HVCC builds on existing Fannie Mae and Freddie Mac seller-service guidelines to “increase the reliability of appraisals” for loans sold to the both these agencies.
To make a long story short, the changes being implemented through the HVCC are really intended to protect everyone and are for the greater good (yes - “the greater good”) by setting requirements so that the individuals and organizations requesting the appraisals have no influence on the outcome of the actual appraisal itself. Thus, the HVCC:
* Prohibits lenders and 3rd parties from influencing appraisals;
* Requires lenders to ensure that borrowers get a free copy of appraisal reports at least three business days before closing;
* Allows lenders to have in-house appraisers, so long as they’re completely independent of the sales staff and their compensation does not depend on their estimates or on loan closings;
* Requires lenders to test a randomly selected 10 percent (or other statistically significant percentage) of appraisals and report any problems to Fannie Mae or Freddie Mac, which may force lenders to buy loans back from them;
* Requires lenders to report appraisal misconduct to applicable state agencies;
* Etc. and so forth.
In a nut shell, the HVCC sets guidelines to prevent real estate appraisers from being intimidated, bribed or otherwise influenced in their developing their valuation on a particular property. As you can imagine, there has been a lot of resistance on the HVCC throughout the industry; Real Estate Brokers, Agents, Lenders, Appraisers, investors, and even the end consumer are all going to be affected in one way or another.
WHAT KINDS OF PROPERTIES DOES THIS APPLY TO?
Now, as far as the types of real estate properties that this pertains to, we would need to take a closer look at what both Freddie and Fannie to say.
For Fannie, the HVCC only pertains to conventional, single-family loans and NOT to multifamily loans, or to loans insured or guaranteed by a federal agency. For Freddie, the HVCC also only pertains to single-family mortgages as well (no big surprise there).
NOW THAT I KNOW THE INTENT, WHERE CAN I GET SPECIFICS?
To start out with, a copy of the HVCC can be found on the Fannie Mae web site.
To download a copy, simply go to the following website and once you are there, then click on the link for “Home Valuation Code of Conduct”:
https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/
Along with any new code or regulations comes the issues with interpretation of such. Specifically, exactly what does the code mean and what can (and can not) be done. To help along with that, the various agencies have put out Frequently Asked Questions on the HVCC. At the above link for Fannie Mae, you have access to not only to the 6-page code itself, but also Fannie Mae has put together a nice list of Frequently Asked Questions and a replay of a recorded Webinar on the topic.
Some of the more interesting outputs from the FAQs include:
* The Code does NOT specifically prohibit communication by a real estate agent with an appraiser;
* The Code DOES prohibit an appraiser from collecting payment for the appraisal directly from the borrower;
* The Code ONLY applies to Appraisals and does not apply to other valuation methods (i.e. automated valuation models (AVMs), broker price opinions (BPOs), tax assessments, etc.); and
* The Code prohibits mortgage brokers from ordering appraisal services, but brokers may initiate the appraisal process on a lender’s behalf in accordance with arrangements made by the lender.
Interesting to see how this all plays out, what tweaks are made over the coming months, and how this will impact not only the end user, but also anyone in the business or industry as well.
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New Fannie Mae Investor Reserve Guidelines
April 22, 2009
I have been asked recently for some clarifications on the recent changes from Fannie Mae on Reserve Requirements when purchasing Investment Properties. As you may know, Fannie Mae has repeatedly changed its guidelines on this topic. Staying on top of this information is key as a real estate investor.
Per Fannie Mae’s February 6th Announcement:
When the borrower will own one to four financed properties (including the subject property) the reserve requirements are:
* two months of reserves on the subject property if it is a second home,
* six months of reserves on the subject property if it is an investment property, and
* two months of reserves on each other financed second home or investment property.
When the borrower will own five to ten financed properties (including the subject property) the reserve requirements are:
* two months of reserves on the subject property if it is a second home,
* six months of reserves on the subject property if it is an investment property, and
* six months of reserves on each other financed second home or investment property.
Note: The reserves calculation for a financed property is based on the monthly housing expense of the financed property. All reserve requirements are based on the new definition of reserves as defined in more detail in Fannie Mae Announcement 09-02.
So just as a numerical example, let’s say you want to finance an investment property costing $100,000 that will result in payments of $1,000 per month. Then your cash requirements will be:
1. 20% Down (typically): $20,000
2. 6 Months Reserve: $ 6,000
3. Closing costs: $ 2,500 (estimated).
In this example, then lender would be looking for $28,500 in your accounts to get approval.
You can click here for your copy of the announcement, or you can get it from:
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0902.pdf
Hopefully this helps clear things up for those of you confused on the new Fannie Mae Reserve guidelines for investors.
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Fannie Mae Increases Lending Caps
March 28, 2009
To help support the needed financial recovery, Fannie Mae has announced that they are changing their recent investor cap on the total number of mortgages under the same borrower. In the later part of 2008, Fannie Mae reduced the total number of mortgages that an investor can have from 10 down to 4! This resulted in investors scrambling for higher-rate in-house programs and even higher rate private funds for investing.
Now with the issuance of Announcement 09-02 by Fannie Mae, the cap has been temporarily lifted back up to 10 properties. While still sorting to the details, for properties #5 to 10, it looks like 75% LTV with a minimum of 720 credit score and above. The requirements apply to any investment property or second home loan being delivered to Fannie Mae, regardless of whether Fannie Mae is the investor on the borrower’s other mortgages.
You can read more details on this by clicking on the below link: http://www.gozoneonline.com/FannieMae0902.pdf
Remember that most banks, even with this rule, may still limit the total number of mortgages that you have with their institution. However with this said, it greatly opens the doors back up for investors in the GO Zone trying to take advantage of the benefits before the end of this year.
Given this temporary reprieve from Fannie Mae, the timing of the remaining GO Zone benefits, and based on previous Fannie Mae changes over the past 9 months, I suggest that any serious investor who has been wanting to invest in the GO Zone do so now before the cap rules change back and while you can still find high-quality and affordable opportunities.
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