Depreciation Recapture Applies When GO Zone Property is Exchanged for Non-GO Zone Property

Janna Shearman CES
May 28, 2008 — 2,140 views  
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In general, GO Zone property is property substantially all of the use of which is in the active conduct of a trade or business in the GO Zone.  The GO Zone, or Gulf Opportunity Zone, is certain counties and parishes in Alabama, Louisiana, and Mississippi that were affected by Hurricanes Katrina, Rita, and Wilma in 2005.  In order to encourage development in the GO Zone, the Gulf Opportunity Zone Act of 2005 provides for 50% additional first year depreciation for GO Zone property first placed in service by taxpayers on or after August 28, 2005.  Such bonus depreciation is effective for GO Zone property placed in service on or before December 31, 2007 (December 31, 2008, for qualified real property), and is effective for certain GO Zone extension property (qualified property located in those parishes or counties in the GO Zone most heavily damaged) placed in service on or before December 31, 2010.

Earlier this year the IRS released Notice 2008-25, which deals with situations in which the bonus depreciation taken on GO Zone property (including GO Zone extension property) must be recaptured when such property is disposed of in a like-kind exchange under §1031 or an involuntary conversion under §1033.  Generally, if GO Zone property is exchanged for other GO Zone property, no recapture of the bonus depreciation is required.  However, if GO Zone property is exchanged for non-GO Zone property, then the excess depreciation over what would have been allowed if the first year bonus depreciation had not been taken must be recaptured.  The amount to be recaptured is treated as ordinary income and is determined before the application of §1031, §1033, §1245, or §1250.

See Notice 2008-25 for guidelines and examples on calculating the depreciation recapture.  See also Notice 2007-36 for additional guidance on taking the GO Zone bonus depreciation.

Janna Shearman CES

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Janna Shearman is vice president and manager of the Louisiana office of First American Exchange Company, a division of The First American Corporation (NYSE: FAF), America's largest provider of business information. She has worked in the exchange industry since 2004 and has attained the designation of Certified Exchange Specialist®. As a frequent lecturer on 1031 exchanges, she provides continuing education credit courses for attorneys, accountants, title insurance agents, and Realtors®.