GO Zone Depreciation

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Juan Mares

Real Estate Consultant · Mission Viejo, California

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Nov 15 '07, 02:33 AM

Southern Investor wrote about it on another topic. Here is his quote.

Originally posted by "Southern Investor"

Some Basics on the GO Zone Act of 2005

(GO Zone=Gulf Opportunity Zone)

Part of the confusion about the GO Zone is that there are actually three of them--one for Wilma, one for Katrina, and one for Southern Florida (don't remember which Hurricane, exactly). Each of the Zones offer various means of aid to local businesses, but for commercial properties and residential rental properties there are two areas of interest:

1) Bond money for rebuilding
2) Bonus depreciation

By far, it is the bonus depreciation that has garnered the most interest. In short, you take a 50% bonus depreciation the first year.

The depreciation is ONLY available through the Katrina GO Zone, which effects counties in Louisiana, Mississippi, and Alabama. The property must not have been under contract before the date of the storm and must be put into service before the end of 2008. There will be an extension on that deadline for the counties hit the hardest in Mississippi and Louisiana.

The property must either be new, or, if the property needed extensive repairs, you could take the depreciation on the rebuilt/repaired section.

Talk to a CPA or attorney who is versed in the GO Zone or willing to become so. Both the property and the investor must qualify.

1) You need a business history of investing in residential rental or commercial properties to qualify for the GO Zone.

2) The property you buy must be residential rental (and entered into the rental pool) or be commercial.

3) The land value does not apply. You get an additional 50% on the improvement value of new property or 50% of conversion (repair, remodeling, etc.) for existing property.

4) For new properties, you should consider buying from the developer. Flipped properties are bring pushed as GO Zone but probably won't qualify.

5) Again, talk to a CPA and/or an attorney. I expect the IRS to try to keep you from qualifying. You need someone on your side who undestands the Act. (And, no, I cannot recommend anyone. I wish I could.)

Wade Ogletree

What he failed to mention is that your participation in the Small Rental Assistance program will get you a check from the government for investing and helping rebuild the area affected by Katrina. I am more familiar with the Katrina GO ZONE. The Small Rental Assistance Program or SRAP is giving 27500 per unit you invest in and rent out to Mississippians. There is a building bonus of 9,000 if your building is completed by a certain date. The area of Biloxi MS has been moved to 2010. To get this money from SRAP you need to hold the property for 5yrs and it will be under rent control for those 5 years. SRAP puts a 5yr lien on your property for the amount of money they have given the investor and is forgiven once those 5yrs are completed. If you invest in a duplex which is 2 units you get 27,500 X 2= 55,000 and the 9,000 X 2= 18,000 for a total of 73,000 from the SRA.

I hope this helps.

Edited: 06/26/2010 at 04:16AM

Dan Bui

Real Estate Investor · Castro Valley, California

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Nov 15 '07, 10:26 AM

Is there a limit based on personal income? Is it phased out at certain income?

Edited: 06/26/2010 at 04:16AM

Paul Wheeler

Real Estate Investor · Rialto, CA

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Sep 04 '08, 12:23 AM

From my understanding if you make over $150k you can only take a max of $25k deduction. Which still sounds good to me.

Edited: 06/26/2010 at 05:50AM

Dawn Vought

Real Estate Investor · Commack, New York

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Sep 04 '08, 09:45 AM

I was looking into purchasing GO ZONE property in Biloxi, MS a few months ago. I discussed the accelerated depreciation with my CPA, who handles a lot of real estate investors, including myself.

His comments were that if you sold the property before the 27.5 years standard depreciation time, you would need to "recapture" or basically give back any accelerated depreciation that was taken. I would highly recommend you talk to your CPA directly about your specific situation.

Edited: 06/26/2010 at 05:50AM

Will Barnard

Rehabber · Santa Clarita, California

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Sep 04 '08, 10:08 AM

Some people will not even qualify for the depreciation deduction, including anyone who earns over $150k annually. Also note that not everyone will qualify for the SRAP program and the amount you must decrease your rent (rent control) equals the amount you receive upfront, so the only benefit is having the cash upfront if you can invest it wisely.
Also note that several other hurricanes have hit and threatened the same areas. That said, why would you want the risk of investing in an area prone to hurricane devistation. The entire time you are waiting for your insurance to pay, you are coming out of pocket for the mortgage and other expenses without any tennats paying you rent.
50% upfront depreciation does not sway me to invest there, and as another has mentioned, you will have some depreciation recapture. I highly reccommend you speak with an experienced RE CPA or Tax attorney.

Edited: 06/26/2010 at 05:50AM

Will Barnard, Barnard Enterprises, Inc.
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Tommy Burke

Developer · Chicago, Illinois

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Sep 18 '09, 01:24 AM

There is recapture however there are also ways to avoid it such as proper tax planning as you would do before selling any investment property..... 1031's, structured sales, ect. The reality of the Go Zone bonus is gives you the opportunity to have more liquid readily available to play with. Not to mention Biloxi which is still Go Zone eligible is the #1 market in the country for investors.

Edited: 06/26/2010 at 09:45AM