For those of you who have been here since the beginning, it seems like it was just the other day when you could do some good and get rewarded for your efforts; a win-win situation for all! I am talking about the GO Zone tax benefits put in place by the Internal Revenue Service after Hurricane Katrina destroyed the Mississippi Gulf Coast. Many people have moved on to new headlines that occupy their days:
* Trapped miners recently rescued in Chile;
* Election Season is here again;
* The Earthquake in Indonesia;
* The BP oil spill;
* and still others.
However, with the window for the GO Zone benefits quickly coming to an end (I will reiterate below), there is one topic that should be at the forefront of your mind:
* Getting a HUGE and legitimate Tax break from the IRS!
That is right, you may have forgotten but with a the purchase of a qualified GO Zone property, you may get a huge tax benefit from the IRS this year. Specifically, you can see up to 50% bonus depreciation available the year that you purchase. This means (as will show in the below example) a tax benefit of $60,000 for purchasing just one single single-family home this year.
The catch? The offer from the IRS ends soon (see below).
SO HOW MUCH IS IT WORTH?
To put this in perspective, let’s look at an example. Suppose that you are purchasing a new single family home construction. Specifically, a 4-sided brick, 3-bedroom, 2-bath, 1300 ft2 single family home in the Gulfport MS area for $145,990. In this example let’s say that the land cost is at $22,990. The 50% Bonus Depreciation is calculated to be $61,500 (subtract out the land from the purchase price and then calculate the depreciation from there). Said another way, with this one qualified purchase, you could deduct $61,500 from your tax liability for the year. Not bad, eh?
GO ZONE EXTENSION RECAP
Previously, the IRS already extended benefits out until the end of this year. There are a few caveats to the extension. First of all, the benefits are only available in a subset of the original GO Zone areas. In Mississippi, the eligible counties remaining are Harrison, Hancock, River, Stone, and Jackson Counties.
Next, there is a time catch to the benefits;
TIME IS TICKING
There are 2 key things that you need to realize about the GO Zone benefits.
#1 – In order to qualify, you need to complete your purchase by the end of this year (2010); and
#2 – To maximize your benefits, the construction (in the case of new homes) should have been completed by the end of 2009.
Why, you may ask? Well, the reason lies in the depths and details of the IRS Code. Basically (and following with the example above), 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 your GO Zone benefits.
However, given the way that the IRS rules are written you will only be able to take the Bonus Depreciation on that portion of the structure that was completed ON OR BEFORE December 31st, 2009.
* From one extreme, if the home you are considering was not started until after January 1st 2010, don’t waste your time;
* From the other extreme, if the GO Zone home you are considering in the Gulfport/Biloxi area was completed before January 1st 2010, then you are golden!
* And in the middle case, if the new home construction was started late in 2009 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.
So to sum up here, you should look for homes that have their completion in 2009; usually a copy of the certificate of occupancy (CO) will help you out in this field.
BUT WHAT ABOUT ANOTHER EXTENSION?
There is a lot of speculation going around the investor circuit that the IRS was going to have a second extension put in place. If this 2nd extension was passed, this (based on the speculation) would extend the GO Zone benefits by at least another year or 2.
After hearing the rumors and speaking with a lot of investors who would, needless to say, be VERY interested in such an extension, I decided to call the source. It took some time and digging, but I was able to speak with the group within the Internal Revenue Service that was directly responsible for the initial Gulf Opportunity Zone legislation. They helped clarify the current situation and gave me a clear cut answer. Unfortunately, the answer is that the current legislation still stands (i.e. this IS the last year for benefits) and that there were no extensions even in the works as it would pertain to non-commercial purchases and benefits.
PITFALLS TO AVOID
With only 60 days left in the calendar year (at the time of publication), the rush is on for GO Zone procurements; the real estate investors and real estate professionals know this, the local home builders know this, and real estate agents know this as well. With that said, one thing that YOU need to watch out for are potential home purchases that have been previously rented. Note that if you are not the person who is introducing the home into the rental market for the first time since the construction or upgrade to the property, then you would not be eligible for the benefits.
Not all is gloom and doom. The “good” (i.e. qualified in the eyes of the IRS) homes are out there; they are just are becoming harder to find by the general public and real estate investor alike.
WHAT CAN AN INVESTOR DO?
Having been in the Mississippi GO Zone since day 1, and working closely with a lot of real estate investors, let me tell you what the real seasoned investors are doing:
1. They make sure that the homes were completed before the end of last year (2009) or were CO’d early in 2010. This is to maximize their GO Zone benefits and Bonus Depreciation by meeting the construction deadlines imposed by the IRS in their legislation;
2. The seasoned investors align themselves with reputable real estate professionals and/or groups who are knowledgeable in the GO Zone and have been in the GO Zone since day 1. They work with these groups to not only find the remaining ideal properties, but also to work with them to identify key players and “team members” in the area to help with their purchase/investment (i.e. local lenders who work with investors, property managers who are local and familiar with the rental and rent-to-own market, etc.);
3. They also realize what the builders have known for quite some time. That the end of the year (and this year especially) will bring higher demands and this will facilitate higher prices to get the same tax benefits.
CONCLUSION
While the IRS previously granted an extension of GO Zone benefits, they have not only caused confusion as to the best way to maximize these benefits for real estate investors, but also induced a high demand given their construction completion requirements. The smart investor who thinks ahead of the crowd and works with the right property group will reap the benefits that are still available now.
