GO Zone Depreciation Deduction

If you are expecting to pay a lot in taxes this year, and you are also interested in investing in real estate, this is the time to schedule an appointment with your CPA to talk about the GO Zone.

The GO Zone Special Depreciation Allowance provides a special additional deduction of 50% of the property's depreciable basis for the first year that you claim this deduction. To be eligible for this deduction, the investment property also has to be located in one of the core disaster areas enumerated by the GO Zone legislation.

The core disaster areas are as follows:

Alabama. The counties of Baldwin, Choctaw, Clarke, Greene, Hale, Marengo, Mobile, Pickens, Sumter, Tuscaloosa, and Washington.

Louisiana. The parishes of Acadia, Ascension, Assumption, Calcasieu, Cameron, East Baton Rouge, East Feliciana, Iberia, Iberville, Jefferson, Jefferson Davis, Lafayette, Lafourche, Livingston, Orleans, Plaquemines, Pointe Coupee, St. Bernard, St. Charles, St. Helena, St. James, St. John the Baptist, St. Martin, St. Mary, St. Tammany, Tangipahoa, Terrebonne, Vermilion, Washington, West Baton Rouge, and West Feliciana.

Mississippi. The counties of Adams, Amite, Attala, Choctaw, Claiborne, Clarke, Copiah, Covington, Forrest, Franklin, George, Greene, Hancock, Harrison, Hinds, Holmes, Humphreys, Jackson, Jasper, Jefferson, Jefferson Davis, Jones, Kemper, Lamar, Lauderdale, Lawrence, Leake, Lincoln, Lowndes, Madison, Marion, Neshoba, Newton, Noxubee, Oktibbeha, Pearl River, Perry, Pike, Rankin, Scott, Simpson, Smith, Stone, Walthall, Warren, Wayne, Wilkinson, Winston, and Yazoo.

For the tax-savvy reader, a pertinent excerpt from IRS publication 4492--detailing this special depreciation allowance--has been provided below. The entire IRS publication can be downloaded at http://www.irs.gov/pub/irs-pdf/p4492.pdf.

Special Depreciation Allowance You can take a special depreciation allowance for qualified Gulf Opportunity (GO) Zone property (as defined below) you place in service after August 27, 2005. The allowance is an additional deduction of 50% of the property’s depreciable basis (after any section 179 deduction and before figuring your regular depreciation deduction). The special allowance applies only for the first year the property is placed in service. The allowance is deductible for both the regular tax and the alternative minimum tax (AMT). There is no AMT adjustment required for any depreciation figured on the remaining basis of the property. You can elect not to deduct the special GO Zone depreciation allowance for qualified property. If you make this election for any property, it applies to all property in the same class placed in service during the year. Qualified GO Zone property. Property that qualifies for the special GO Zone depreciation allowance includes the following. Tangible property depreciated under the modified accelerated cost recovery system (MACRS) with a recovery period of 20 years or less. Water utility property. Computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. (The cost of some computer software is treated as part of the cost of hardware and is depreciated under MACRS.) Qualified leasehold improvement property. Nonresidential real property and residential rental property. For more information on this property, see Publication 946. Other tests to be met. To be qualified GO Zone property, the property must also meet all of the following tests. You must have acquired the property, by purchase, after August 27, 2005, but only if no binding written contract for the acquisition was in effect before August 28, 2005. The property must be placed in service before 2008 (2009 in the case of nonresidential real property and residential rental property). Substantially all of the use of the property must be in the GO Zone and in the active conduct of your trade or business in the GO Zone. The original use of the property in the GO Zone must begin with you after August 27, 2005. Used property can be qualified GO Zone property if it has not previously been used within the GO Zone. Also, additional capital expenditures you incurred after August 27, 2005, to recondition or rebuild your property meet the original use test if the original use of the property in the GO Zone began with you. Excepted property. Qualified GO Zone property does not include any of the following. Property required to be depreciated using the Alternative Depreciation System (ADS). Property any portion of which is financed with the proceeds of a tax-exempt obligation under section 103. Property for which you are claiming a commercial revitalization deduction. Any property used in connection with any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, or any store, the principal business of which is the sale of alcoholic beverages for consumption off premises. Any gambling or animal racing property (as defined below). Property in the same class as that for which you elected not to claim the special GO Zone depreciation allowance. Gambling or animal racing property is: Any equipment, furniture, software, or other property used directly in connection with gambling, the racing of animals, or the on-site viewing of such racing, and The portion of any real property (determined by square footage) that is dedicated to gambling, the racing of animals, or the on-site viewing of such racing, unless this portion is less than 100 square feet. Recapture of special allowance. If, in any year after the year you claim the special allowance, the property ceases to be qualified GO Zone property, you may have to recapture as ordinary income any excess benefit you received from claiming the special allowance.