Bonus Depreciation
GO Zone Bonus Depreciation Video Transcript
This is a presentation intended to explain the GO Zone depreciation, and how it applies towards you. I understand that this can be some pretty dry material, but I urge you to look in this opportunity, as it is very possible to completely offset not only this taxable income, but several years to come. A lot of people want to know what is this GO Zone depreciation that I hear so much about and how long it is going to be around. In the areas that we’re working in, it’s going to be offered until the year 2010, and I’ve come across a common misconception that only real estate professionals qualify for this depreciation and that simply just isn’t true. Most people qualify, and in fact, the average person does qualify, and should take advantage of what is considered to one of the largest tax benefits ever offered by our federal Government.
So, how is this depreciation calculated?
We are going to use a single family home at Hancock County as an example that has a purchase price of 139,000$. A lot on Hancock County is about 8,000$ which has to be subtracted from the purchase price, because land is never considered a depreciable asset by the IRS. That leaves us with about 131,000. If you get half of that the 1st year, it gives you 65,500. You also get 50% of the normal straight line depreciation which when you add those together is over $67,000 in your first year.
To qualify for bonus depreciation, the property must be in a designated Go Zone area, new or newly renovated, that is put into rental service before 2010, and it must be part of your trade or business.
To qualify as a trade or business, you must actively participate in the property. This does not mean that you can’t use a management company, but it does mean you have a role in the management process, or the decision making process. We try to make this as easy as possible by using a management company that has an online software system, so you can access details about your tenants and help in the selection process.
So now for the important part - how does this depreciation benefit you, and how do you qualify? You are going to run into 2 scenarios, the first being that you or your spouse are real estate professionals, and the second that you and your spouse participate in the business of renting out the property.
These are 5 common categories that people fall into in general, and we are going into detail in the following slides. This 1st one is the most common one that people know about, and that is the real estate professional. To qualify as a real estate professional under IRS tax codes, you must meet 2 tests. The first is that you must spend 750 hours or more in a year on real estate, and the second is that you spend half of your working time on real estate. A great way to solidify your status also as a real estate professional is to hold either your realtor’s license or your broker’s license. Under the References section of our website, you will find links to IRS tax codes, and you could go through this detail with your CPA.
If you meet real estate professional requirements, this is honestly a no brainier situation for you, and you should be purchasing in the Go Zone because this depreciation can be used to offset active income. This is any income that you report, commissions etc, and it is very likely that you can offset all taxable income not only this year but also carry it back after 5 years and forward 20. These carry rules apply to everyone, not just the real estate professionals. The difference between a professional a W2 income earner is that when you are a professional, you can use it towards active income, and when you are not, you can use it towards passive income.
So, let’s look at an example of a real estate professional. Let’s say that you are a very successful real estate broker. You’re looking this year at an income of about $400,000. If you purchase 3 of the single family homes that we used previously in this presentation, you have over 2000$ in depreciation. So, if you are in a 35% tax bracket, that is going to give you a tax obligation this year of $140, 000. So, you can use this depreciation to completely offset that $140,000, and choose to either carry it back or forward, until that amount is exhausted. This is huge that you get to keep this money, instead of giving it to the government.
This one is the most common misconception that I’ve encountered during any of my consultations with people. A lot of people say Skylar, I’ve heard about this depreciation and it’s a great thing, but I don’t qualify because I am not a real-estate professional. This is simply not true. In fact, you benefit as much as the real estate professionals because you receive 25,000$ in real estate benefits on your taxes, and quite honestly, you don’t even make enough to pay a large tax amount to exceed that 25,000$. So, in reality you benefit just as much real estate professionals
So, let’s look at an example of this. Let’s say that your combined Adjusted Gross Income is less than 100,000$. Let’s say that its 60,000 and you’re in the 25% tax bracket. That’s going to leave you with a tax obligation of $15,000. So, if you purchase 1 single family home at Hancock County, you could completely offset that liability, plus carry that amount back 5 years or forward 20, until it’s exhausted. So its very possible to not only pay taxes for this year, but 5 years or more, not to mention that this is in an appreciating market with a high rental demand.
In this example, the combined AGI income is over 100,000, but less than 150,000. This is very similar to the previous example, except that for every dollar over $100,000, the benefits decrease by 50 cents. If your AGI is 125,000$, it drops in half to 12,500, but this is still a huge advantage to you in reducing your taxes.
In this situation, the person’s AGI is over 150,000, and a lot of people in this income level already have passive income to offset. An example of this would be cash flow properties that you have, whether its apartment buildings, multi family, and if you are at this income level and do not have any passive income, then you are going to fall into the next category when you go over.
If you are at a 150,000 plus AGI level and you do not have any passive income, you need to add real estate to your portfolio. I‘ve had several doctors and lawyers ask me how can I benefit from this, and help shield some of my income. If your spouse doesn’t work full time or at all, it is very feasible for you to work out a plan with your CPA to document hours to establish real estate professional status. This is definitely time well spent to completely offset income that you have. It is also very possible for you to take 45 hours out of a year, hop on line, get your real estate license, do some practicing, learn some things and get that real-state professional status, and help offset your taxable income.
So, the next steps would be to go over all this stuff with your CPA. Feel free to give us a call and ask questions and you will actually get myself and I am more than happy to go over all this with you in detail. I look forward to your call.
