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GO Zone: Original Use

One of the requirements placed upon properties for GO Zone depreciation is the "original use" clause.  According the the HR 4440 explanation, "the original use of the property within the GO Zone must commence with the taxpayer on or after August 28, 2005."  The IRS has commented now on what that means.  

The following does not constitute legal advice.  This is simply my understanding as a Realtor and investor.  Please speak to your lawyer of CPA.  (See Notice 2007-36, sec. 5.01 and 5.02)

Original use means the first use to which the property is put.  The use of the property by the taxpayer may not be the same as its original use.

Additional capital expenses to recondition or rebuild property already owned or previously bought meet the requirement.

The purchase of reconditioned or rebuilt property does not qualify unless that property has not yet been put to use within the GO Zone.

Let us consider a residential rental property within the GO Zone.  It suffered damage and needed repairs.  Assuming the repairs were made during the qualifying time-frame, here are some possible scenarios:

1) The owner invested $50,000 to rehabilitate the property.  The $50,000 would qualify for bonus depreciation.

2) The property was sold as-is to another investor.  The investor spent $50,000 rehabilitating the property before placing it on the rental market.  The $50,000 would qualify for bonus depreciation. 

3)  The owner invested $50,000 to rehabilitate the property and then sold it without having put it back onto the rental market.  The purchasing investor could claim $50,000 for bonus depreciation.

4)  The owner invested $50,000 to rehabilitate the property and then rented it out.  He then sold to another investor.  The property would not qualify for the bonus depreciation because the original use did not commence with the taxpayer.

 

Source: This article was based on a news briefing from ria.thompson.com.

 

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Wade Ogletree, Associate Broker, Century-21, Professional Services
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