- Tax-exempt bond financing
- Low-income housing credit
- Expensing demolition & clean-up costs
- Extension of environmental remediation costs
- Increase in rehabilitation credit
- Special incentives for timber producers
- Public utility disaster losses
- Expansion of Hope scholarship & Lifetime Learning for students
- Housing relief
- Employment relief
- Emergency tax relief for Hurricane victims
- Treatment of NOLs for GO Zone losses
- Bonus Depreciation
NOL (Net operating loss) from qualified GO Zone properties can now be carried back 5 years or carried forward 20 years. What this means is that you can carry back or forward the NOL (from bonus depreciation) to help offset passive or active income.
Example 1: Realtor Ann earned $60K in 2003, $60K in 2004, $100K in 2005, 2006 and 2007 and expects to earn $120K in 2008. She decided to be aggressive and bought four GO Zone properties in 2007 that gave her $60K of depreciation per home for a total of $240K. She decides to use $120K of depreciation to offset her income in 2003 and 2004. She had enough write-offs in 2005-2007 so she saves her remaining $120K in depreciation to offset future income in 2008.
Bonus Depreciation is the major benefit for investors. It allows for a single one time write off of 50% of the depreciable basis of the property. Therefore, if you purchased a qualified GO Zone rental property for $140K and the depreciable portion is $130K, then you could conceivably write off a total of $65K in the year of purchase.
How do you qualify? The property must be purchased after August 27, 2005 and it must be placed in service before January 1st 2011. A person can qualify two basic ways – as a real estate professional who performed more than 750 hours of service during the tax year in real property trades or businesses in which you materially participated. The other qualification is being a real estate investor with a minimum of 100 hours of material participation. The investor’s benefit will be determined by his/her qualification, income and financial situation.
Example 2: Semiconductor engineer Bob exercises his stock options from his Silicon Valley start-up and gains $700K (passive income). Because he has also been a real estate investor putting in more than 100 per year of material participation, he is eligible to purchase GO Zone rental property to utilize the bonus depreciation. In this case, he purchases several properties with a depreciable basis of $1.4M. Now he can depreciate it 50% and offset all his passive income.
Example 3: Retail manager Gary earns $50K/yr and has been an active real estate investor with 100 hours of material participation. He purchases a GO Zone property with $60K of bonus depreciation. He can only offset a maximum of $25K of passive income (if he had any) due to his earnings of less than $100K. If he had been a full time realtor or real estate professional (750 hours), he would have been able to offset all his income and have $10K of depreciation left over to carry back 5 years or carry forward 20 years.
Example 4: Realtor Al sold a new condo in Hawaii for an $80K profit. Because there was not enough equity for positive cash flow, he did not do a 1031 exchange. However, being a real estate professional, he utilized the GO Zone bonus depreciation by purchasing a property with approximately $75K of depreciation. He will now only pay taxes based on the $5K profit. The $80K in profit was not long term capital gain (less than one year) and it would have been taxed under ordinary income.
PS: Tax information is used only for illustration purposes. Please check with your own tax professional for individual tax scenarios.
