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. I am, of course, talking about the GO Zone bonus depreciation and GO Zone benefits that the IRS has put in place that reward you for helping rebuild the Mississippi Gulf Coast after Katrina.

Here we are, years later and with tons of new homes built to help restore the area, many people have moved on to new headlines that occupy their days:

* The BP oil spill;
* Trapped miners rescued in Chile;
* Election Season;
* and 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 Tax break from the IRS!

That is right, you may have forgotten but with a qualified GO Zone purchase, you may get a huge tax benefit from your favorite uncle (Sam that is); up to 50% bonus depreciation available the year that you purchase. This could mean (as will show in below example) a tax benefit of $60,000 for just one single single-family home purchase.

The catch? The offer 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 new home construction. Specifically, a brick exterior 3/2 1300 s.f. single family home in the Gulfport MS area for $142,000. In this example the land is estimated at $22,000. The 50% Bonus Depreciation is calculated as:

Purchase Price$142,000
Land $22,000
Total Construction$120,000
Bonus Depreciation $60,000

Said another way, with this one qualified purchase, you could deduct $60,000 from your tax liability for the year. Not bad, eh?

GO ZONE EXTENSION RECAP

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 County;
* Hancock County;
* River County;
* Stone County; &
* Jackson County.

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.

PITFALLS TO AVOID

As we approach the end of the year, the rush is on for GO Zone Properties and some builders and agents know this. One thing that you need to watch out for are previously rented units. If you are not the person who is introducing the home into the rental market for the first time since the construction/upgrade, then you would not be eligible for the benefits.

These homes are out there, they just are becoming harder to find by the general public and real estate investor alike.

WHAT THE SMART INVESTORS ARE DOING

Working with a lot of real estate investors, I can see what the seasoned investors are doing:

1. They are making sure that to maximize their GO Zone benefits and Bonus Depreciation that the homes were completed before the end of last year (2009) or were CO’d early in 2010;

2. They get with reputable 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 in the area to help with their investment (i.e. local lenders who work with investors, property managers who are local and familiar with the market, etc.).

3. They also realize what the builders know. That the end of the year 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.

Author Bio: Michael C. Zari leads GoZoneOnLine.com, a free real estate investing club without the hype. His works have been referenced in venues including NY Times and USA Today. To get his thought-provoking articles, go to Real Estate Investing Club!

Category: Real Estate
Keywords: Real Estate, Investment, GO Zone, Gulf Opportunity Zone, IRS, Bonus Depreciation, Tax Savings