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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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
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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 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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