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"Go Zone" Investments
In an effort to stimulate investment in, and the rebuilding of the hurricane ravaged section of our country, the government is offering significant tax incentives to real estate investors and small business owners via the GOZONE.
On December 21, 2005, the president signed the Gulf Opportunity Zone Act of 2005 (H.R. 4440). The Act provides relief for taxpayers with business activities in the GOZONE. Qualifying real estate and businesses are located in portions of the Hurricanes Katrina, Rita and Wilma disaster areas. You may go to www.irs.gov for a listing of these qualifying areas.
The Act provides a deduction of 50% of the adjusted basis of 1) Real property using the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less; 2) computer software; 3) water utility property; 4) qualified leasehold improvements; 5) residential and nonresidential real property. A key to eligibility of a commercial property is currently used in a trade or business where the original in service date is post August 27, 2005. The original in service date for residential income property must be prior to 2009. There is an additional deduction allowed of up to 50% of the cost of debris removal if the debris is from structures damaged in the hurricanes or the demolition of existing structures.
The taxpayer may also elect to carry back a Net Operating Loss (NOL) for up to five years. What and how properties qualify for the NOL carry back are specific and should be discussed with a tax professional familiar with the GOZONE and the specific tax situation of the taxpayer. There are some exceptions regarding the Alternative Minimum Tax (AMTI) for a NOL with a five year carry back. It should be noted that the 50% depreciation also applies to new property built prior to 2008 and there are increased tax write offs for small businesses with operating losses incurred post August 27, 2005.
Assumptions are a $3 million purchase price with $2 million worth of depreciable improvements for a residential investment property, 27.5 year depreciation schedule (MACRS)
$2,000,000
| Improvements
|
$1,000,000
| 50% Bonus Depreciation
|
$36,362
| Typical 27.5 year Depreciation
|
$1,036,362
| First Year Depreciation
|
$36,362
| Depreciation every year after
|
While GOZONE incentives are attractive from a tax planning perspective, both long and short term economics must be considered, and, as with any investment, a well defined exit strategy is key. As always a consultation with your legal and tax professional is a necessity. Sources: www.irs.gov, www.gozonefordummies.com, www.gozoneonline.com
You can reach Alan Johnston at 1-877-4 TM 1031, or email him at alan@www.tm1031exchange.com to discuss your specific needs. TM 1031 Exchange assists investors in planning and executing successful real estate investment strategies. Visit www.tm1031exchange.com for a complete list of investment properties and to download the TM 1031 Tool Kit.
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