WHAT IS THE GO ZONE
KATRINA EMERGENCY TAX RELIEF ACT AND THE GULF OPPORTUNITY ZONE ACT.
Seeking to provide immediate relief to the damage caused by Hurricane Katrina, Congress passed the "Katrina Emergency Tax Relief Act of 2005" (KETRA) on September 23, 2005. This legislation contained tax relief provisions specific to the Hurricane Katrina disaster, which amounted to $6 billion in temporary tax breaks. Shortly after enactment of KETRA, Hurricane Rita hit Southwest Louisiana and Eastern Texas and was followed by Hurricane Wilma, striking the state of Florida. In reaction to the widespread hurricane devastation of the Gulf Coast region, Congress passed the "Gulf Opportunity Zone Act of 2005" (GOZA) in December 2005. GOZA created tax incentives valued at almost 59 billion targeting rebuilding of the Gulf Coast. In addition to KETRA and GOZA, the Internal Revenue Service (IRS) provided relief to taxpayers impacted by Hurricanes Katrina, Rita. and Wilma. This established economic zones called the Gulf Opportunity Zone. The Act provides that the terms "Gulf Opportunity Zone" and "GO Zone" mean that portion of the Hurricane Katrina disaster area determined by the President to warrant individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina. The Act also provides that the term "Hurricane Katrina disaster area" means an area with respect to which a major disaster has been declared by the President before September 14, 2005. Gulf Opportunity Zone Act Bonus Depreciation Individuals investing in the Go Zone can take a special first year depreciation deduction for qualified property acquired and placed in service in the GO Zone after August 27, 2005. and before January 1, 2008 (before January 1, 2009 in the case of nonresidential real property and residential rental property). The special deduction is equal to 50 percent of the qualified property's depreciable basis. Enhanced Section 179 Individuals also can annually deduct up to $200,000 in qualifying property expenditures placed in service in the GO Zone. This is double the amount otherwise allowed for expensing. In addition, the phase-outs for level of investment increased from $400,000 to $1 million, allowing more individuals to use this tax benefit. These provisions apply to qualified property acquired and placed in service in the GO Zone after August 27, 2005 and before January 1. 2008. (Plus indexing for inflation).
WHAT DOES THIS MEAN TO ME!!!
Individuals investing in the GO ZONE now have an unprecedented opportunity to take advantage of Tax Legislation that has never happened before and probably will never happen again. Never Never Never Never, has an individual been able to depreciate 50% of Residential Rental Property in the first year. The object of purchasing rental property is to accomplish several things. First and foremost is to obtain property that will appreciate in value and can be rented easily. Second is to obtain property that will pay all of the bills including the principal payments or in the vernacular used by real estate investors to “provide a positive cash flow”. Third is to be able to sell the property at some time in the future for more than you paid for it and to obtain capital gains treatment on the gain from the sale. If you are able to do all of these things then it is a win-win situation with the exceptions of having to pay income tax on the income from the rental property. This income tax results from the positive cash flow in number two and the non deductibility of the principal payments. These principal payments are to be offset by the depreciation on the property. The only problem with that is the depreciation is over 27 and ½ years. This almost always in a good property (i.e. one that meets the above three requirements) results in taxable income. Depending on your tax bracket this could cost you 30% to 40% of your positive cash flow. Now under the Bonus Depreciation rules of the act all of the bad things (paying tax on your positive cash flow) are gone as long as you follow the three rules listed above. The Gulf Opportunity Tax Act in an effort to provide housing lost in the hurricane has provisions to encourage investors to purchase residential rental property.
Now the only question is are you willing to take the opportunity for this once in a lifetime investment opportunity.