How To Invest In The GO Zone Without Getting Burned

The Gulf Coast real estate market is flooded with rumors and misunderstandings about the GO Zone that can be quite costly to investors. The GO Zone can be a great investment opportunity, but there are specific requirements you must meet in order to qualify for the tax incentives.

About the GO Zone tax break

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The Gulf Opportunity Zone Act of 2005 was passed to encourage investment in parts of the Gulf Coast after Hurricane Katrina. It features special incentives to encourage investment in the areas that were hardest-hit. Most investors are drawn to the GO Zone for one reason: 50% Bonus Depreciation. If you qualify, you can take 50% depreciation in the year you purchase a GO Zone property. (Rental real estate is normally depreciated over 27.5 years so you can depreciate a little less than 4% per year). In addition, you can apply this tax benefit backwards five years or into the future twenty years. This could be a real benefit to you if you have a lot of earned income in the past five years or in coming years. As you might guess, the IRS established very specific conditions that need to be met in order for a house to qualify as a "GO Zone property".

Qualifying for the GO Zone tax break

In order to qualify for the GO Zone tax break, both you and the property need to qualify. The property must be acquired after August 27, 2005 and located in an area designated by the President as a disaster area. It must be used in the active conduct of a trade or business, and not as a personal residence. See IRS publication 4492 for additional information. Additionally, the investor must meet the IRS’s definition of a “Real Estate Professional”. Specifically, this means you must “materially participate” in the development, management, buying, or selling of real estate for no less than 750 hours per year (IRS Publication 925).

Other considerations about buying GO Zone property

• Where is the "path of growth"? Where should you buy?
• Will it really appreciate like the Realtor says it will?
• What happens to your tax benefit if you sell the house?
• Will it provide positive cash flow or will you have to come out of pocket to pay the note every month for the next 30 years?
• Does the investment stand on it’s own? If it wasn’t for the bonus depreciation, would it still be a good investment?

Keep in mind that if you depreciate your property 50% in the first year you won’t be able to take deductions for much depreciation in future years.