GO Zone Update and Tax Incentives Explained

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.  Just a quick head’s up on something from experience.  Given the demand of the remaining inventory that was already on the ground prior to the start of 2010 (and that the high-quality and desirable ones are getting grabbed up quickly), you will have to act quick if you want to benefit from the huge tax incentives.

GO Zone Extensions, Deadlines, & Tax Benefits Simplified

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 Benefits Ending in 2009!

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Click This Link From IRS Publications
Note The Following In The Above Web Page:
.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.

GO Zone Extension - 2010

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.