Thursday, July 31st, 2014

What tax benefits are granted to a GO Zone?

The following post was written by our GO Zone tax advisor.

Tax benefits are granted from governmental taxing authorities so as to direct private enterprise activity towards a desired direction. In the case of real estate investing in the GO Zone, taxing authorities wanted to stimulate investment activity predominately through the granting of early recognition of GO Zone depreciation and providing a barrier for that early recognition from the effects of the alternative minimum tax (AMT). Other benefits were also granted.

As normal, it was anticipated by the Legislatures that the Treasury Department would develop the rules and regulations needed to implement the legislation. This has yet to be completely done. The current result is the rules and regulations are not totally fixed in regard to each and every question or situation that might arise.

The following is a sample of a letter I could have sent to clients in 2005 alerting them to most of the federal tax benefits of the GO Zone legislation:

Sample GO Zone Benefits Client Letter:

There were two tax law changes last year relating to Hurricane Katrina that may affect your 2005 tax return or provide opportunities for your tax returns for 2005, 2006, 2007, 2008, 2009 and 2010. The Katrina Emergency Tax Relief Act of 2005 (KETRA) and the Gulf Opportunity Zone Act of 2005 (GO Zone Act) provide tax relief to individuals and businesses affected by Hurricane Katrina’s devastation. Among other items, the Act:

(1) extend the deadline for filing eligible tax returns and making certain payments for income, gift, employment, estate and gift, and excise taxes to February 28, 2006;

(2) allow eligible individuals to withdraw up to $100,000 from their IRAs or pensions without incurring a 10 percent penalty, and allow those individuals to spread income subject to tax from these withdrawals over three years;

(3) increase the limit on loans from pension plans from $50,000 to $100,000;

(4) allow 401(k), 403(b), or IRA distributions used to purchase a home in the hurricane disaster area to be recontributed in certain circumstances;

(5) extend the Work Opportunity Tax Credit to Hurricane Katrina Employees. This group is comprised of individuals who, before the hurricane, resided in an area that is now eligible for major disaster area assistance;

(6) provide an employee retention tax credit for small businesses located in the disaster area that retains eligible employees on their payrolls;

(7) for charitable donations, provide an election for individuals to lift the 50 percent adjusted gross income limit and phase-out rule for cash donations to any charity and, for corporations, to waive the 10 percent income limitation for hurricane relief-related cash donations made from August 28, 2005, until the end of 2005;

(8) waive the tax on certain forgiveness of debt related to Hurricane Katrina for individuals who lived in the hurricane disaster area;

(9) under the involuntary conversion rules, increase the time that owners have to replace business property in the disaster area that was damaged in the hurricane from two years to five years, and increase the time to replace a principal residences from four years to five years;

(10) provide an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of eligible property;

(11) extend the bonus depreciation deduction for property that had to be placed in service by December 31, 2005, to later dates on a case-by-case basis;

(12) increase the amount of business property that may be expensed under Code Section 179;

(13) expand the Hope scholarship and lifetime learning credit for students attending eligible institutions in the affected area;

(14) allow a deduction for certain demolition and clean-up costs;

(15) increase the NOL carryback period; and

(16) provide a temporary income exclusion for certain employer-provided housing.

Also, in tax years 2005 or 2006, a taxpayer may claim an additional exemption of up to $2,000, for housing a Hurricane Katrina displaced individual. The housing must be provided free of charge.

As a resident of the GO Zones and given the many possibilities for tax relief available for these tax years, it is important we discuss the impact of these and other tax issues.

The GO Zone legislation can also provide material tax benefits for qualifying investors in the GO Zone. There are many benefits for qualifying GO Zone investors. Please contact our office if you would like to discuss the tax effects of potential investment in the GO Zone.

For the purposes of this tax summary, we will only discuss those aspects which relate to real estate investment.