Do You Want $60K In Deductions From Uncle Sam?
April 13, 2009, Writen by: Chris Anderson, Ph.D
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‘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 15th, 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 1st.
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:
- 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!
- 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.
- 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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Who Is "REALLY" Making $ In Today's Real Estate Market?
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Good Information you share I thrive on valuable updated knowledge and not the invaluable outdated hype that’s injected into the industry.
Are there any restrictions on deductions when you don’t live in the state you buy in? for example, if an investor lives in california and buys in mississippi, does that investor still receive the full benefits of the tax deductions or is there a penalty for not living in the state you purchase?
No, no restrictions on the state. Realize that you will be taking this deduction against your FEDERAL income taxes, not your state.