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:

1. 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;
2. 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;
3. 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.

Go Zone Extension - Is There Still Time?

April 20, 2009

There is still a lot of confusion about when does GO Zone benefits end, especially for real estate investors.  Every time that  I send out an email about the Go Zone, I get several emails in return saying “didn’t that end after 2008?”.

The reason for the confusion is that MOST LOCATIONS DID END in 2008…… but not all.  There was an extension put into place for some of the hardest hit areas from hurricane Katrina.

Bottom line is that in certain locations in Mississippi and Louisiana, you can claim bonus depreciation benefits through 2010. In Mississippi, the eligible counties are:

* River;
* Stone;
* Hancock;
* Harrison; &
* Jackson.

For Louisiana, there is a much longer list of parishes including:

* Calcasieu;
* Cameron;
* Orleans;
* Plaquemines;
* St. Bernard; and
* St. Tammany.

In Alabama, no addition counties will remain open for bonus depreciation or GO Zone benefits after 2008.

The American Institute of Certified Public Accountants has published a handy guide that really summarizes all the rules, dates and locations. Click here to get their PDF report.

Go Zone Webinar - Tuesday, April 21

Buying New Homes For 77 Cents On TODAY’S Retail Amount?

April 15, 2009

In today’s market, everybody is looking for the next “great deal” which is obviously smart investing. However, many investors are also falling into the “you can buy at 50 cents on the dollar” trap. The trap that investors are falling into is that, unfortunately, these numbers are frequently referenced to yesterday’s market value and have little to do with what things are worth today.

Now let’s look at one way to buy new homes at a true 77 cents on the dollar relative to today’s retail value. To accomplish this, we are going to use a combination of a reasonable builder discount coupled with current, special IRS tax legislation. Using absolutely no “smoke or mirrors”, we are going to show you a real-life calculation, using IRS GO Zone tax law, to see how people are really creating equity for themselves.

Let’s look at the following REAL world example for a recent investor:

· True Retail Value: $141,128

· Net Purchase Value: $109,124 (Note 1)

· Net Cash In: $ 8,046 (Note 2)

· Realistic Profit In 3 Years: $51,664 (Note 3)

If you look at the above numbers, they are quite impressive numbers for purchasing and owning a BRAND NEW home and collecting some positive cash flow along the way (note that the positive cash flow has NOT been factored into the above for simplicity reasons). The difficulty is that many don’t recognize these “Net Numbers” when they see them offered on a home sales flier. In this article, we want to take you from actual purchase numbers and then show you how the above “Net Numbers” result. There has been 100’s of Millions of dollars in real estate done using these special tax results. Yet, most investors, and even most tax professionals, “just don’t get it!”

Referring to the above numbers, let’s now address the “Notes”:

NOTE 1: Realize that NO BUILDER in their right mind will sell you a home with that big of a discount to TRUE MARKET, especially when they are truly moving homes at retail prices. In this example, the builder has discounted their retail currently in this slow retail market. In addition, they have provided a reasonable discount to the GO Zone buyer.

The actual, discounted, purchase price on the home is $129,578. But, when you factor in GO Zone tax benefits, there is over $20,000 in real tax savings for an investor in a 35% tax bracket. When you take the actual purchase price and then subtract the tax savings, the NET purchase price becomes $109,124.

NOTE 2: Realize in this lending environment, most investor loans are pretty straight forward with 20% down plus closing costs. Obviously that is less than ideal but yesterday’s excesses impact you today.

In the above example, the total dollars required at closing is $28,416 which includes both the down payment and closing costs. But, when you realize that you get the tax savings back within a year or less, then your NET Cash In becomes that total amount to close minus your tax refund: or in this case, $8,046.

NOTE 3: In the GO Zone, while retail homes have seen a slow down they have not seen a “crash” like in other locations. Home pricing is very reasonable relative to income and the strong demand is expected to return with a small shift in the economy, home buyer incentives, relaxed credit, etc.

I know it seems strange to be discussing potential price escalation but at these locations, most professionals tend to agree that we have to go up in the area. Using a past, reasonable safe escalator of only 5%/year, you get to a retail value of over $163,000 in 3 years. Obviously nobody has a crystal ball and you can apply your own witchcraft here. However, when you look at the economic strength of the region, most agree that the area should do just fine over time.

Robert Kiyosaki once wrote that the wealthy “see” finances very differently than the average person by factoring in all aspects of a transaction including net tax considerations. As this example has shown, this is especially true for tax advantaged properties, such as found in the Katrina GO Zone.

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Do You Want $60K In Deductions From Uncle Sam?

April 13, 2009

‘Twas the week before tax day, and all through the country, not a sole was sleeping soundly, not even the wealthy.

I know, I know….. it’s terrible to take such liberties with a favorite Holiday story and ruin it with the tax season. But, it just seemed so appropriate!

As we all approach our favorite day of the year, April 15^th, we all make that vow that we do every year……., “I have got to do some better tax planning.” Unfortunately, it usually goes the same path as our vow to lose weight beginning January 1^st.

Fortunately, Uncle Sam has provided an easy way for real estate investors to substantially reduce their tax burden via buying properties in what is referred to as the “GO Zone”.

What Is The Go Zone?

The Gulf Opportunity (GO) Zone Act was passed in late 2005 as a mechanism to spur redevelopment in Hurricane Katrina impacted areas. In 2005, these areas included parts of Alabama, Mississippi, and Louisiana and are now referred to as “GO Zone” areas.

Modeled after the Liberty Zone legislation passed to spur growth in New York after 9/11, GO Zone legislation was enacted to entice the private sector to pour substantial dollars into hurricane Katrina impacted locations. The good news is that it has worked and we have seen it work first hand.

While there is a ton of potential benefits to you, the one most often discussed in real estate investing circles is called “Bonus Depreciation”. In layman’s terms, this allows investors the opportunity to claim a 50% bonus depreciation during the first year that a GO Zone qualified property is put into the rental pool. As the example below shows, this can be a huge tax benefit.

A Very Simple Example

Suppose that you buy a new house for $140,000 in Biloxi, Mississippi and put it into rental service. Also, let’s suppose that the lot value for that home is $20,000. Here is how the transaction would look.

House Purchase Price: $140,000

Land Value: $20,000

Net Structure Value: $120,000

Allowed Bonus Depr: $60,000

So how would you like to deduct $60,000 from your income next year before computing bottom line tax values? What if you bought 10 of these like some of our clients have? In addition, you may be interested to know that this loss could be carried backwards or forwards, so it is quite possible to go back and recover already paid in taxes.

So Why Hasn’t Everyone Bought GO Zone Properties?

While the GO Zone is certainly news to many people and many tax professionals across the country, realize that it has been used…… a lot. In many hurricane impacted areas, it has already played a significant role in putting housing back on the ground.

One of the reasons that you don’t see it discussed everywhere is that this is NOT something that fits every single person. Without getting too technical, the GO Zone tax code is wrapped around existing IRS depreciation code, passive losses, etc. So, let me give you the cheat sheet. If ANY of these categories fit you, then you may want to look at the GO Zone more carefully:

1. Real Estate Professionals: Those who spend 51% or more of their time in “the business” of real estate have tremendous opportunity to use their depreciation losses to offset their actual income. Note – you do NOT need to be a licensed Real Estate Agent to qualify for this category!

1. High Wage Earners With Non-Working Spouse: Many people have structured their affairs so that the non-working spouse manages their properties and gets classified as a real estate professional: this also DOES NOT mean that they have to become a licensed real estate agent.

1. Adjusted Gross Income < $150,000: Depending on exact income, there are some specific paths for deducting up to $25,000 of bonus depreciation loss.

My Recommendation:

After having participated in all aspects of the GO Zone since 2005 and running the largest GO Zone website (GoZoneOnline.com), let me offer an observation. Because this topic involves tax code, many people (myself included when I first got involved) spend days and days trying to understand what is happening and frequently end up frustrated. Unless you are well versed in tax law, you will pull your hair out.

Instead, here is what you REALLY need to grasp:

• If you are in one of the 3 above classes of people, then you need to answer if this makes sense for your personal situation? Once you understand the layman’s basics, then there are tax pro’s that for a couple hundred dollars, can assess your specific situation rapidly and advise you on how to proceed. More than likely, your regular tax professional will be in the dark as much as you. But with some outside help, you can rapidly determine your personal situation.
• Assuming you want to participate in the GO Zone, then you need to understand:
  • What areas to are best to buy in;
  • What types of properties are best to buy and why;
  • How to find a good deal.

It really is that simple and definitely is not rocket science. To help readers come up to speed, we are going to hold an introductory webinar, April 21, to cover these topics.

Sign Up For April 21st Go Zone Training Webinar

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Investor Alert: Rental Guarantees

April 9, 2009

Another one bites the dust.  Another investor lead astray by what looks like a great thing to the uninitiated: the rental guarantee.

As I write this, I learned that an investor went from buying what I think is one of the best properties that I have seen in the Go Zone to what is in my opinion, junk.  Why?  Because they were lured in by the “security” of the marketers rental guarantee.

Now don’t get me wrong….. Sometimes a rental guarantee is a great thing on an investment property but the reality is that it is rare.   In fact, we are evaluating a deal right now with a rental guarantee but our Red Flags were immediately raised…. Time will tell if the project we are examining happens to be one of those rare cases that works with a rental guarantee.

WHAT IS A RENTAL GUARANTEE?

Quite simply, it is an agreement between the seller and the buyer that they, or a related company will lease the property for some period of time.  One example that can work really well is when a subdivision builder sells their model home to an investor and then leases it back as a sales center.  That can make a lot of sense for everyone involved.

These rental agreements tend to be as short as 3 months and can be as long as 2-3 years.  In addition, the seller might be leasing back a single unit, such as for the model home above, or they may be leasing back a ton of units and then they plan to sub-lease them to minimize their negative cash flow.

RED FLAG #1

When done with multiple units for long periods of time, the lease back represents a substantial monetary liability to the seller.  So why would a seller offer this?  One possible (and common) explanation is that they are making a boatload of money on the sales of the units and the leaseback represents a small risk.   By offering a leaseback that hope to get a bunch of investors to start buying in which case the seller will do just fine.

Generally this occurs when the property is overpriced relative to market.  So the “game” is to mark up the property higher than market value, make a bunch of money, and then offer a rental guarantee to make this attractive to investors.  But of course, they can’t show that the property is overpriced so somehow they will also need to convince the investor that they are getting a good deal.

For this Red Flag, you should take any discussions on “appraised value” or “market value” with a degree of skepticism and really try to verify.  Every once in a while you will find a property that has a leaseback AND is actually priced right…… then you have found an interesting deal.  Just realize this is rare.

Red Flag #2

This leaseback can be a substantial financial undertaking for a builder/developer if many units are involved.  So, for example, suppose that they offer this for 50 units in a complex at $1,000 per unit, for 24 months.  So their total liability is:

50 Units *$1,000 * 24 = $1.2 Million

Obviously they probably PLAN on renting out these units, and they PLAN on selling enough units to be strong enough to cover this but will their PLAN work?  If not, good luck on getting all your PLANNED lease payments.   However, if what you are buying is till very rentable on the market, with or without them, then your are in a great position.

Red Flag #3

Is the leaseback consistent with market rents?  One other common “gimmick” is to offer a leaseback higher than market rents to make the numbers look good.  Based on Red Flag #2 and you always needing to plan on those leaseback payments stopping, then you really do need to know the market rent values.  If, however, the lease back amount does line up with market rents, then that is a good indication…… the question is how will you, as the investor, know what the market rents are for the area?

Conclusion

Again, don’t misunderstand my intent.  SOME RENTAL GUARANTEES are good and as mentioned earlier, we are evaluating a deal with one right now.  However, when you hear about an offered property with a rental guarantee, always go back and check your 3 Red Flags.

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Go Zone Real Estate: Let Uncle Sam Pay Your Bill

March 28, 2009

Since I have been immersed in the Katrina Go Zone for the last two years, it amazes me that many real estate investors and tax professionals have no idea what the Go Zone is or how it can help them reduce taxes to zero for this year, and potentially 5 years to come.

But I realize that even though I have been living & breathing this for the last several years, in reality this is an obscure piece of tax code that most people, and most tax professionals know nothing about…. That is unfortunate.

For purposes of this blog post, let me give you a short primer of the Go Zone legislation and then point you to a great resource if you want to learn more:

• Tax code enacted in 2005 to help Hurricane Katrina impacted areas;
• Allows investors to deduct up to 50% of the purchase of SOME real estate the first year on their taxes;
• This is called “Bonus Depreciation” and can result in tax savings of 10s, 100s, or even millions of dollars;
• Not a new concept….. The Government used this same trick after 9-11:  called the Liberty Zone;
• This best applies to three classes of people:
  • Real Estate Professionals;
  • People with adjusted gross incomes less than $150,000
  • High income W-2 earners but with spouses not working.
• Typically property must be new and put into rental service;
• Currently limited to a few counties in Mississippi and a few parishes in Louisiana;
• You need to own your structure before the END OF 2009 based on current legislation

If you want to learn more about this, go to this resource:

Go Zone Information

Go Zone Extension For 2010

March 28, 2009

There is still a lot of confusion about when does GO Zone benefits end, especially for real estate investors.

Bottom line is that in certain locations in Mississippi and Louisiana, you can claim bonus depreciation benefits through 2010. In Mississippi, the eligible counties are:

• River;
• Stone;
• Hancock;
• Harrison; &
• Jackson.

For Louisiana, there is a much longer list of parishes including:

• Calcasieu;
• Cameron;
• Orleans;
• Plaquemines;
• St. Bernard; and
• St. Tammany.

In Alabama, no addition counties will remain open for bonus depreciation or GO Zone benefits after 2008.

The American Institute of Certified Public Accountants has published a handy guide that really summarizes all the rules, dates and locations. Click here to get their PDF report.

• Who Is "REALLY" Making $ In Today's Real Estate Market? Our 29,689 Members Tend To Agree... It's Usually Not The GURUs Have you ever noticed that every "Guru" real estate pitch sounds the same........ They once were poor, but now are rich working only 5 hours per week, and you can be rich too if you just buy their "can't fail system". Or have you noticed that every property promote has a can't miss proposition, if you just buy TONIGHT.  At the NoBullRE club, we are huge believers in real estate investing...... but we also know that every approach has two sides: Nothing is perfect.  If you want unbiased ("No Bull") facts of who is making money, how are they doing it, and where do they get their knowledge, then you don't want to miss joining the NoBullRE Club  IT'S FREE (FOR NOW) Name Email See What Others Are Saying SECURE & CONFIDENTIAL Your info will never be shared CONFIDENTIALITY GUARANTEED

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