In the recent news for real estate investors, there has been a lot of discussion about the tax benefits of investing in Go Zone; i.e., those areas impacted by hurricanes Katrina, Rita, and Wilma. In this article, we explore the concept of bonus depreciation and how it can apply to you.
The GO Zone Act allows for a significant acceleration of the normal depreciation deduction by allowing a bonus depreciation deduction in the first year. Qualified GO Zone Property is placed in service equal to 50% of its cost, in addition to the normal depreciation deduction for the balance of such costs. This benefit is available to businesses of all sizes, and there is no dollar cap on the total amount of bonus depreciation that can be claimed. The bonus depreciation can be used for investments in Qualified GO Zone property, which must meet the following four elements: (1) Eligible property (generally, equipment, non-residential real property or residential rental property); (2) substantially all of the use of which is in an "active trade or business" in the Go Zone; (3) the original use of which began in the GO Zone on or after August 28, 2005; and (4) which was acquired by purchase for which there was no written binding contract for its acquisition in effect before August 28, 2005.
Though hurricane Katrina affected most of the states of Alabama, Louisiana, Florida, and Mississippi, not all parishes are covered by the provisions of the GO Zone Act. In Louisiana, for example, only 37 parish areas are eligible to claim the benefits provided by the act. Some of these parishes are Calcasieu, Jefferson, Orleans, Plaquemines, St. Bernard, St. Charles, St. James, St. John the Baptist and Washington. The areas covered by the act are the so-called Core Disaster Area or the GO Zone. The window of opportunity for using the bonus depreciation is narrow. Qualified GO Zone property must be placed in service by December 31, 2007 for personal property and on or before December 31, 2008 for real property.
The 50% bonus depreciation is available for both costs incurred on new projects and rehabilitation costs. (Costs incurred for replacement, renovation or rehabilitation of existing property are treated as separate property for purposes of the GO Zone Act.) Opt-outs of bonus depreciation allowance are permitted by asset class.
There are some restrictions on the use of bonus depreciation. If any portion of property is financed with tax-exempt bonds, that entire property is ineligible for bonus deprecation. Gaming property is excluded, as is property used in connection with any private or commercial golf course, country club or liquor store.
Recapture provisions apply if the property ceases to be Qualified GO Zone Property (usually because it is sold or because it is moved out of the GO Zone). The use of the deductions afforded by bonus depreciation also remains subject to the normal limitations found in the at-risk and passive activity rules.
Dr. Chris Anderson is a co-founder of GoZoneOnline.com, the leader in Go Zone information for real estate investors. Visit us today to learn how you can receive outstanding, Go Zone qualified properties by email. We specialize in all areas including the Alabama Go Zone. |
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