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.