Though the GO Zone Act has many provisions, there are a few that
are of particular interest to real estate investors. This overview focuses
on these.
Go-Zone Bonds
Two Types of GO-Zone Bonds
Exempt Facility Bonds:
Qualifying
project costs include 1) those for the acquisition, construction,
reconstruction, and renovation of nonresidential real property and public
utility property, and 2) the cost of qualified residential projects. A
project is a qualified residential rental project if 20% or more of the
residential units in such project are occupied by individuals whose income is
60% or less of area median gross income, or if 40% or more of the residential
units in such project are occupied by individuals whose income is 70% or less
of area median gross income.
Qualified Mortgage Bonds: Residences
located in the GO Zone are treated as targeted area residences. Therefore, the
first-time homebuyer rule is waived and purchase and income rules for targeted
area residences apply to residences financed with bonds issued under the
provision. One hundred percent of the mortgages must be made to mortgagors
whose family income is 140% or less of the applicable median family income. In
addition, the amount of a qualified home-improvement loan that may be financed
with bond proceeds is $150,000.
Note: The Alabama Housing Finance
Authority has $10,000,000 available at 5.375% and $25,000,000 at
5.75%, for 30-year, fixed rate mortgages on homes who's sales price does
not exceed $289,705.
A family of two's combined income from all sources cannot
exceed $69,720, for a family of three or more, that
number rises to $77,100. There are other restrictions but,
generally, these funds are available to buyers who qualify for FHA,
VA, or Fannie Mae's MyCommunitiesMortgage loans.
For qualified buyers, down
payment assistance is provided for up to 6% of the purchase price by
way of a fixed-rate second mortgage. The rate of the second
mortgage is either 5.375% or, in some cases 0%.
The bonds cannot be used for movable fixtures and equipment,
country clubs, hot tub facilities, suntan facilities, liquor stores, massage
parlors, golf courses, or properties that dedicate 100 square feet or more to
gambling, animal racing, or the viewing of animal racing.
Bonds can be issued through December 31, 2010, and is limited
to $2,500 times the population within the GO Zone.
Bonds can be used to acquire existing property but only if
expenditures are made for rehabilitation of the property equal to at least 50%
of the amount of proceeds used to acquire the existing property.
Depreciation
For property acquired on or after August 28, 2005 and placed
in service before the end of 2008 (2007 for personal property), the GO Zone
Act allows for a 50% bonus depreciation allowance and exempts this allowance
from the ATM (alternative minimum tax). There are four requirements a
property must meet in order to qualify.
1) It must be one of six qualifying property types. We
will only concern ourselves with two of those six: nonresidential real
property and residential rental property. (I will add that a third
property type is qualified leasehold improvement property to which the general
Modified Accelerated Cost Recovery System (MACRS) rules apply.)
2) Substantially all of the use of the property must be in the
GO Zone and must be in the active conduct of a trade or business by the
taxpayer in such Zone. This specifies the location of the property, but
is also speaks to this being in the conduct of a trade or business.
Potential investors who are not already investing in residential rental
property should form a corporation through which to purchase and operate the
property, thus meeting this criteria.
3) The original use of the property must begin with the
taxpayer on or after August 28, 2005. There is some debate over how the
IRS will define "original use". This is particularly important
in regards to the question of whether or not a flipped property will
qualify.
4) The property is acquired on or after August 28, 2005.
In addition, there could be no written binding contract for that acquisition
before August 28, 2005.
Properties that do not qualify include tax-exempt bond-financed
property and qualified revitalization buildings.
Read the
Original Documents
Wade
Ogletree, Realtor®