Property in the GO [Gulf Opportunities] Zone
There are three tax credits that are significant for commercial property owners in the GO Zone.
- Rehabilitation Tax Credit
- This credit does not apply to new construction.
- A taxpayer may deduct 13% of the cost of rehabilitation costs.
- The building must have been in use before August 29, 2005.
- Work must be completed within 36 months.
- Work must begin by August 15, 2006.
- The cost must be greater than $5,000.
- 75% of the external walls must be retained. It is not clear whether the external walls may be refinished, but I presume than damaged panelling may be replaced and damaged brick rebricked.
- Increased Section 179 and also the extra 50% depreciation allowance
- This credit may apply to new construction.
- The increased section 179 deduction and the extra 50% depreciation deduction do not apply to the building itself.
- They apply only to the following types of property:
- 20-year property--(rare) municipal sewers.
- 15-year property--land improvements such as sidewalks, roads, driveways, fences, landscaping; service stations
- 10-year property--(rare) single-purpose agricultural structures such as silos, feeding bins, etc.
- 7-year property--furniture, fixtures, equipment
- 5-year property--computers
- Usually a taxpayer may deduct all in the first year 100% of these costs up to $108,000. For the GO Zone for the years 2006 and 2007, this limit is increased to $208,000.
- After taking the Section 179 deduction and subtracting it from the cost, a taxpayer may in addition deduct half of the remaining cost.
- The taxpayer is not required to take the Section 179 deduction.
- COMPREHENSIVE EXAMPLE: from IRS Publication 946 (year 2006), page 31:
On November 1, 2006, Tom Brown bought and placed into service in his business qualified GO Zone property that cost $305,000 [The property cannot be a building]. Tom elects to deduct $208,000 ($108,000 + the increased dollar limit of $100,000 for qualified GO Zone property) of the property's cost as a section 179 deduction. He uses the remaining $97,000 of cost to figure his special depreciation allowance of $48,500($97,000 x 50%). He uses the remaining $48,500 of cost toe figure his regular MACRS depreciton deduction for 2006 and later years.
- Removal of debris or demolition
- This deduction is not as valuable as the other two, but occasionally may be needed.
- This deduction is for business properties only.
- 50% of the cost of debris removal or demolition may be deducted as a current expense.
- Usually the cost of demolition must be added to the cost of the new building and depreciated over 29-1/2 years.
- Congress did not think this deduction through before enacting it.
- The entire cost of debris removal is deductible under another deduction that existed before this special rule.
- The decrease in FMV (fair market value) to a property because of a storm or other disaster is deductible.
- For example, if a property is worth $400,000 before the storm and worth $75,000 after the storm, the deduction is $325,000. In figuring the decrease in market value, the taxpayer may consider how much he would have to reduce the cost of selling his property because of the cost to remove debris.
- There is a catch. The decrease in FMV is limited to the original cost less prior depreciation. In the above example, if the property originally cost $100,000 and the taxpayer had taken $60,000 depreciation, then the decrease in FMV would only be $40,000 ($100,000 less $60,000).
- In this case, the 50% of debris removal deduction could be important as a way of partially getting around the disappointing decrease in FMV deduction.
- Rehabilitation Tax Credit
- This credit does not apply to new construction.
- A taxpayer may deduct 13% of the cost of rehabilitation costs.
- The building must have been in use before August 29, 2005.
- Work must be completed within 36 months.
- Work must begin by August 15, 2006.
- The cost must be greater than $5,000.
- 75% of the external walls must be retained. It is not clear whether the external walls may be refinished, but I presume than damaged panelling may be replaced and damaged brick rebricked.
- Increased Section 179 and also the extra 50% depreciation allowance
- This credit may apply to new construction.
- The increased section 179 deduction and the extra 50% depreciation deduction do not apply to the building itself.
- They apply only to the following types of property:
- 20-year property--(rare) municipal sewers.
- 15-year property--land improvements such as sidewalks, roads, driveways, fences, landscaping; service stations
- 10-year property--(rare) single-purpose agricultural structures such as silos, feeding bins, etc.
- 7-year property--furniture, fixtures, equipment
- 5-year property--computers
- Usually a taxpayer may deduct all in the first year 100% of these costs up to $108,000. For the GO Zone for the years 2006 and 2007, this limit is increased to $208,000.
- After taking the Section 179 deduction and subtracting it from the cost, a taxpayer may in addition deduct half of the remaining cost.
- The taxpayer is not required to take the Section 179 deduction.
- COMPREHENSIVE EXAMPLE: from IRS Publication 946 (year 2006), page 31: On November 1, 2006, Tom Brown bought and placed into service in his business qualified GO Zone property that cost $305,000 [The property cannot be a building]. Tom elects to deduct $208,000 ($108,000 + the increased dollar limit of $100,000 for qualified GO Zone property) of the property's cost as a section 179 deduction. He uses the remaining $97,000 of cost to figure his special depreciation allowance of $48,500($97,000 x 50%). He uses the remaining $48,500 of cost toe figure his regular MACRS depreciton deduction for 2006 and later years.
- Removal of debris or demolition
- This deduction is not as valuable as the other two, but occasionally may be needed.
- This deduction is for business properties only.
- 50% of the cost of debris removal or demolition may be deducted as a current expense.
- Usually the cost of demolition must be added to the cost of the new building and depreciated over 29-1/2 years.
- Congress did not think this deduction through before enacting it.
- The entire cost of debris removal is deductible under another deduction that existed before this special rule.
- The decrease in FMV (fair market value) to a property because of a storm or other disaster is deductible.
- For example, if a property is worth $400,000 before the storm and worth $75,000 after the storm, the deduction is $325,000. In figuring the decrease in market value, the taxpayer may consider how much he would have to reduce the cost of selling his property because of the cost to remove debris.
- There is a catch. The decrease in FMV is limited to the original cost less prior depreciation. In the above example, if the property originally cost $100,000 and the taxpayer had taken $60,000 depreciation, then the decrease in FMV would only be $40,000 ($100,000 less $60,000).
- In this case, the 50% of debris removal deduction could be important as a way of partially getting around the disappointing decrease in FMV deduction.