Tired of paying more than your share of Federal income taxes? Wish you could find a way to legally reduce your taxes? You may have found your answer! What if you could purchase a property with $10,000, $15,000 or more in tax incentives and guaranteed income from a corporate tenant?
Let’s look at the tax incentives:
After hurricanes Ike, Katrina, and Wilma; the federal government instituted the Gulf Opportunity Zone (Go-Zone) Act
As a tax incentive to the private sector, tax benefits were created to encourage rebuilding. This tax incentive includes a property depreciation deduction up to 50% in the first year.
A little background for those not familiar with real estate. Any property held as part of a business has a limited life. The IRS has set up criteria for determining the annual amount deductible as depreciation. This value is deducted as an expense of doing business and therefore, tax deductible. (Those wanting more information may go to the IRS.gov site)
The Go Zone Act allows a taxpayer to an additional depreciation deduction of 50% on the first year’s expenses on the property. Suppose a property is purchased for $250,000 in the qualified Go Zone region. If the land is worth 15%, the depreciable amount is $212,500. The standard annual depreciation is. $8,283. Assuming a 30% tax bracket, the deduction nets the taxpayer a tax benefit of $2,455. This is true no matter where the property is located. Property in a qualified Go Zone area has the option of 50% bonus depreciation the first year. The taxpayer is eligible for a depreciation deduction of $106,250. Again using the 30% tax bracket, a tax reduction of $31,875 is realized.
Why would the government reduce taxes? For one thing, the tax deduction is less than what would be spent if the government rebuilt the residences itself. $31,875 is a lot less than the $250,000. This is the government’s incentive for private parties to participate in the rebuilding.
Secondly, many taxpayers may need to spreads the deduction out over time. Due to IRS rules, it may not be possible to use the tax benefit in the current year. Therefore, the allowable tax benefit amount may be carried back 5 years or forward 20, offsetting those taxes owed. In this way, the government is paying over time, reducing current year liabilities.
Third, Depreciation may be recaptured when the property is sold. That means the tax benefit may turn out to be an interest free loan from the government.
Some of you may be aware that the tax benefits were to end on December 31, 2009. The IRS has extended this program for another year.