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Are There Really Benefits to the Go Zone’s Tax Benefits?

It’s Depends on What You Do With Them

Greg Grahn

Over the past few years, numerous literary points and counter-points have been written on the tax benefits of the Go Zone (Gulf Opportunity Zone).1 GoZone Opportunity While some scholars write articles that detail the incredible depreciation write-offs, others note the various negating factors – writing about non-qualifying property scenarios, or investors who are unable to fully utilize the tax benefits, or may have to pay them back in recapture. The end product to this literary soup is confusion; and with confusion comes skepticism; and with skepticism comes inaction. As a result, one of the strongest and most profitable real estate markets in the nation remains overlooked by the common investor.

It is amazing how many areas within the Go Zone have had unparalleled economic predictions and results; yet they have received little influx in investment dollars. Investors understand that there is something positive to the area, but since it primarily deals with tax benefits (as opposed to appreciation); they cannot see specifically how it works well for them. It exemplifies the fact that most investors chronically dismiss the affects that tax benefits may have on their overall investment growth. For many investors, taxes are not an actual part of investing. Investing includes finding an appreciating market, locating the right property, negotiating the best terms, and obtaining favorable financing; taxes are just the unavoidable consequence that comes later . . . and if you pay more in taxes, then you must have done better at investing. So to the average investors, tax benefits are just a occasional perk to investing; they are not a matter for up-front consideration.

The truth about tax is simple, it deals with money—your money. More importantly, it deals with the money you ultimately keep for yourself. While many investors place focus on how much money they can make, most fail to factor in the percentage of that money they will actually retain. Yes, investing is about making money, but the ultimate goal is to obtain greater wealth – so in the end, the importance of utilizing tax benefits is just as crucial.

The Positive and Negative Sides of Depreciation: The primary tax benefit with qualifying Go Zone properties2 is accelerated bonus depreciation in the first year3. Whereas standard non-commercial depreciation is traditionally amortized over a 27.5 year span, qualifying properties in the Go Zone can take bonus depreciation up to 50% of the property’s total depreciable value. As depicted in Graph 1 below, for a property with $275,000.00 of depreciable value, the Go Zone bonus depreciation could equal an extra $41,250 in immediate annual tax savings4.

Although not every investor will have enough taxable income and earnings to utilize the full amount of the write-off, there are continuous amendments to the Go Zone Act which provide for additional means to obtain full Graph 1relief: (Possible examples include writing-off against previous tax returns up to five years, carrying over write-offs for future tax returns, added availability to write-off general income for “real estate” professionals.) The point is, regardless of whether you are able to fully utilize the tax benefit or just some of it, minimally you will recoup a fair portion of your original capital, with more benefits to follow.

The down-side to the Go Zone’s bonus depreciation is “recapture;” the obligation to pay back depreciation when the property is ultimately sold for a profit5. Whereas the general amortized depreciation can typically be deferred through the use of a 1031 Exchange6, it is likely that the bonus depreciation will not be deferrable and thus owed back to the government. It is this repayment that has so many investors confused. Most investors can not see a true advantage in getting a momentary tax relief that ultimately gets sent right back to the government when the property is sold. It just doesn’t make sense – it does not add to the property’s value, nor does it stay in the investor’s pocket –so the benefit seems to be more hype than substance. For these investors, they are missing the big picture.

As noted above, many investors have a limited definition of investing; they look at the real property, or at least the money paid into the property, as being the “investment.” Taxes typically do not affect the value of the property, thus taxes are not part and parcel of actual the “investment.” This, however, is too narrow of a view. Investing is not just what you buy; it is the overall process of how you generate greater wealth. It is taking a portion of your existing (available) money and using it to make more money. Taxes play a significant factor in this by determining how much money you initially have to extend, as well as how much of the returns you get to retain. The Go Zone’s bonus depreciation may only be temporary, but some of the benefits from taking the depreciation can be permanent.

Is Temporary Money Good: Suppose a bank was willing to lend $40,000.00 interest free, with no monthly payments --it would be the busiest bank in the country. Investors could use the bank’s money as capital for more investments. They could then take the profits they earned from the investments, and re-invest those as well – all without having to dip into their own capital reserves. Even if they have to give back the $40,000.00 when they sell the original property, they are still investing with free proceeds –creating several additional income streams, all for free. This is the intent behind the Go Zone’s bonus depreciation. The purpose is not to give away free money, instead it is to provide investors with the ability to freely increase their investment portfolio and create greater wealth over time.

A side effect to the Go Zone’s tax benefit is that because so much emphasis is placed on the depreciation, other investment strengths to the area seemingly go unnoticed. Several Go Zone markets are well above national averages for appreciation and resale7. As for investment financing, many Go Zone areas are listed as top-tier markets, allowing for easier qualifying, higher potential loan to value ratios, and better interest rates. Additionally, developers (due to other tax benefits), are able to put together stronger investments packages whereby they can pay all closing costs, and/or guarantee monthly net rental profits. The true virtue to this area is that they have strong investment components from all different angles. Investors can recoup their initial capital, avoid closing costs, and enjoy nationally high appreciation, while receiving guaranteed monthly net cash flow. . It is not just a highlight of one factor; it is a combination of taxes, financing, growth, appreciation and economics all working in concert.

The benefits of the Go Zone region are well worth looking into, but it takes more effort than simply reading articles such as this one. Look deeply into the companies that provide investment services in this area; speak with tax professionals to determine the tax benefits you can utilize, and then consider the possibilities you can have by re-investing your tax-produced savings. Today’s real estate market has great opportunities – such as the Go Zone – it just takes a little more diligence and effort to move forward.

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2Not all properties and situations fall within the scope of the Gulf Opportunity Act; so make sure in advance that the property you are purchasing, and the management and use of such property, allow for Go Zone tax treatment.
sup>3Depreciable value of property applies to existing structures and fixtures, land value is not depreciable.
4For simplicity purposes the graph is based on a net 30% tax bracket. Actual tax savings, as well as possible limitations on the bonus depreciation will vary depending in investor’s specific circumstances.
5This is just a simplistic and non specific definition of recapture.
6See§1031 of the IRC – Internal Revenue Code
7Biloxi, Mississippi which was ranked first in the nation. Source: Housing Predictor (11/15/08) See also: Realtor Magazine Nov. ’08 and Realtor.org, Nov. 17, 2008