GO ZONE Act
(Gulf Opportunity Zone)
December, 2005

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What is it? The Gulf Opportunity Zone Act was passed by Congress in 2005 to provide tax based incentives for construction and new businesses to the areas of Alabama, Louisiana and Mississippi. Among the provisions of the GO Zone Act are significant opportunities for tax exempt financing or 50% Bonus Depreciation.

What counties qualify? - Alabama has 11 counties (Baldwin, Choctaw, Clarke, Greene, Hale, Marengo, Mobile, Pickens, Sumter, Tuscaloosa and Washington. Also included are certain counties in Louisiana and Mississippi.

What type of property qualifies? Tangible Personal Property acquired and put in the GO zone after 8/28/2005 and before 12/31/2007. Real Property acquired and used in GO zone after 8/28/05 and before 12/31/08.

 

50% Bonus FIRST Year Depreciation

What Qualifies

What This Means
Nonresidential real property rental property such as shopping centers, office buildings, warehouses etc
Residential rental property houses, condos
Qualified leasehold improvements tenant of office building

Example #1

 
New condo purchased on August 1, 2006 in Gulf Shores, Alabama $575,000               (no minimum or maximum limits)
Value allocated to land   (75,000)
Value of condo in building $500,000
 
A total deduction of $258,712 is available in 2006 as follows:
50% Bonus Depreciation $250,000
Regular Depreciation (27.5 years)      8,712
Total $258,712
 
Rental Income $  20,000
Operating Expenses    (10,000)
Depreciation Expense   (258,712)
Net Operating Loss $(248,712)

 

Who Qualifies to Deduct How Much?

 
If You Are An Investor
If you are an Investor with up to $100,000  in Adjusted Gross Income on your federal tax return you may deduct $25,000 in 2006 and carry forward the remaining loss of $223,712 to offset future income. The deduction is totally phased out when your Adjusted Gross Income is greater than $150,000.
 
If You Are A Real Estate Professional (*)
A real estate professional is allowed to deduct $248,712 in 2006. If your Adjusted Gross Income is less than $248,712 you may carry BACK the loss five years and file an amended return for your refund. If you still haven't used the entire $248,712 you may carry forward the unused deduction.
 

(*)Who Is A Real Estate Professional? (as explained in Turbo Tax 2005)
You are an active real estate professional if the following are true:
- You materially participated in a real property trade or business. (see further definition below)
- You performed more than half of the personal services you provided during the year for this business.
- You materially participated more than 750 hours in this business.
- You materially participate in each rental real estate activity.
- You are NOT an active real estate professional if:
* You are an employee of this business (Unless you own more than 5%)

Real property trade or business means any business that involves property:
- Development
- Redevelopment
- Construction
- Reconstruction
- Acquisition
- Conversion
- Rental Operation
- Management
- Leasing
- Brokerage
   
Definition - Material Participation
You materially participate in your business if you are actively involved in the operation of your business.
You materially participated if you pass any of the following tests:
- You participate in the activity for more than 500 hours during the year.
- You are the only person who substantially participates in the activity, including non owners.
- You participate in the activity more than 100 hours during the year and no one else participates more than you do, including non owners.
- You participate more than 100 hours in this and other activities, and the total for all the activities is more than 500 hours.

- Also:
- If you materially participate in a personal service activity for at least three years you are a material participant for life. Personal services include child care, consultant, real estate agent etc.
- You participated in the activity on a regular, continuous, and substantial basis for more than 100 hours during the year.
- If married, you can include your spouse's participation toward the 500 and 100 hour tests.

Requirements: The work you performed must have been:
- Done at the time you owned an interest in the activity, and
- Must have been the type that an owner customarily does.

Exceptions: Any hours managing the activity do not count toward material participation if:
- Anyone other than you received compensation for managing the activity, or
- Anyone spent more hours than you performing services in managing the activity during the year.

 

Example #2
The Red Box company enters into a lease for office space on January 1, 2006. They spend $800,000 on leasehold improvements and occupies the premises on December 1, 2006.

A total deduction of $400,000 is available in 2006.
 

Example #3
XYZ Company buy a tract of land on March 1, 2006 to build a new office building with a completion date of July 1, 2008. The total cost of construction is $2,000,000.

A total deduction of $1,000,000 is available in 2008.

 
 
Disclaimer: RE/MAX of Gulf Shores makes no representations about the qualification of any specific property or anyone's ability to claim any tax deduction. Each property and each tax payer is a separate transaction. Please consult with your tax advisor before entering into any transaction.