When portions of the gulf coast states, Alabama, Louisiana, and Mississippi, were ravaged by Hurricane Katrina in 2005, the Government stepped in to create the Gulf Opportunity Zone, or GO Zone. The idea was that the best way to attract private investors to the area was to create tax incentives that were too good to pass up.
Certainly investors seeking a deal would have come without incentives, but the GO Zone deal attracted many more. Plenty of companies began pushing the incentives to sell real estate. So if it worked fairly well for the gulf coast, could a similar program work for the nation as a whole?
A Quick Review
The primary piece of the GO Zone legislation allows accelerated depreciation for non-residential real estate (rental properties) placed into service between August 27, 2005 and December 31, 2010. This could be used for new construction or existing real estate. This accelerated depreciation allows you to take a deduction of 50% the first year on the depreciable portion. So if a property was purchased for $250,000 with $50,000 of that considered the value of the land, then the depreciable portion is $200,000. That means that you could take 50% of that, or $100,000, as a depreciation deduction in the first year.
Of course there were some strings attached. The full depreciation could only be taken by those who were deemed to be real estate professionals. However, many real estate investors are able to take advantage of that providing that they spend the majority of their time in real estate related activities.
Could It Work?
What if a similar program was created on a national scale? Call it the USA Zone, what if it applied to bank-owned real estate as a way of dealing with the foreclosure mess? Many investors are shying away from real estate; maybe this is a way to lure them back in. The idea is not to lure the little guy back in but rather to attract bigger investors. Instead of having them look for other places to put their money, it could be put back into real estate. Perhaps this would be a way to speed up the absorption of foreclosed properties and get them off of the bank’s balance sheets. Perhaps the banks could go back to doing what they should be doing instead of managing real estate portfolios.
There could be FHA loans specifically for USA Zone properties. Properties would have to meet certain guidelines for this financing. The main thing would be to relax the four-property rule that limits the number of homes an investor could buy with mortgages from Fannie Mae. Of course, there would have to be safeguards and oversight attached to the program. We certainly don’t want to re-create the real estate feeding frenzy that precipitated this mess in the first place.
Have a Better Idea?
Sure this would be expensive, but look at the trillions that have already been spent on bailouts. Instead of just handing out money that we don’t have, a plan like this would encourage private investment. If you like the idea send a copy of this article to your Senators and Congressmen. If you have a better idea let’s hear it.
Last year we said, ‘Things can’t go on like this’, and they didn’t, they got worse. – Will Rogers