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O'Sullivan Creel, CPA
Real Estate Provisions

50% depreciation for real property

For qualified property placed in service in the Gulf Opportunity Zone (GOZ) on or after August 28, 2005 and on or before December 31, 2008, and additional 50% the first-year depreciation allowance can be claimed. The deduction must be claimed unless the taxpayer affirmatively elects not to take the additional allowance.

In order to qualify for 50% special allowance, the following requirements must be met:

  • The property must be nonresidential property or residential rental property utilized in a trade or business within the GOZ
  • The original use of the property in the GOZ mush begin after August 28, 2005. [Note that used property can qualify only if it has not been used in the GOZ prior to its use by the tax payer, effectively prohibiting used real property from qualifying. Only expenditures for reconditioning or rebuilding used real property, as outlined below, can qualify for the special allowance.]
  • The property must be acquired by purchase on or after August 28, 2005
  • The property cannot have been subject to a binding contract in effect before August 28, 2005
  • The property must be placed in service on or before December 31, 2008

Expenditures to recondition or rebuild property in the GOZ also qualify in the original use of the property begins on or after August 28, 2005. However, as stated above, the cost of the used property does not qualify for the additional allowance; only cost for conditioning or rebuilding.

The additional depreciation allowance cannot be claimed on the following types of nonresidential real property:

  • Golf courses
  • Country clubs
  • Massage parlors
  • Hot tub facilities
  • Suntan facilities
  • Liquor stores
  • Gambling or animal racing property

The 50% depreciation allowance also applies to qualified leasehold improvement property. To be qualified leasehold improvement property, the property must meet the following requirements:

  • It must be an improvement to an interior portion of a nonresidential building
  • It must be made to a property that
    • is under lease, or
    • is subject to a lease (i.e. the improvement can be made to property that is going to be leased)
  • The improvement must be made by the lessee or lessor
  • The portion or the building that is being improved must be occupied exclusively by the lessee
  • The improvement must be placed in service more than 3 years after the building was first placed in service (i.e. does not apply to leasehold improvements to new facilities, for example)

The leasehold improvement provisions do not apply to the following improvements:

  • Improvements that enlarge a building
  • Any expenditure related to an elevator or escalator
  • Any improvements to a structure component benefiting a common area
  • Any improvement to the internal structural framework of the building

A lease between related persons does not qualify for these provisions

Retirement Plan Withdrawals

Qualified hurricane distributions of up to $100,000, received by an individual in either 2005 or 2006, are subject to special rules. A "qualified hurricane distribution" is one from an eligible retirement plan that is made to an individual whose principal residence was located in the GOZ and who sustained an economic loss as result of the storm. The distribution for Katrina victims must be made on or after August 25, 2005 and before January 1, 2007. The taxpayer's principal place of abode must have been in the Katrina disaster area on August 28, 2005. Unless the taxpayer elects otherwise, the taxable portion of a qualified withdrawal is included in income ratably over three years beginning with the year or withdrawal. These withdrawals are subject to 10% penalty tax normally associated with early plan withdrawals (any excess of the $100,000 limit would be subject to this tax).

Qualified distributions can be made from IRAs, qualified plans, a tax-sheltered annuity, a qualified annuity plan, an eligible governmental deferred compensation plan, and, during 2006, a Roth contribution plan. Any qualified withdrawals may be re contributed to a retirement plan within three years of the date of withdrawal. Also a taxpayer who received an allowable distribution from a retirement plan for purposes of buying or building a house and who, because the planned purchase or construction was cancelled as a result of the hurricane, re contributed the funds to the plan prior to March 1, 2006 is not subject to tax or penalty on the funds. Receipt of the funds must have been after February 28, 2005, and before August 29, 2005 in order to qualify for this provision.

The limitation on loans from qualified plans has been increased to $100,000 (or if less, 100% of accrued benefit) for qualified taxpayers. To qualify, the taxpayer's principal place of abode must be in the Hurricane Katrina disaster area and the taxpayer must have sustained an economic loss as a result of the storm. This provision applies to loans made during the period beginning September 24, 2005 and ending on December 31, 2006. Additionally, repayment requirements of qualified taxpayers for loans from retirement plans has been deferred for one year for payments due on or after August 25, 2005.

Note that the IRS in Notice 2005-92 stated -

 

The definition of Katrina distribution under section 101(d)(1) of KETRA does no limit the designation to amounts withdrawn solely to meet a need arising from Hurricane Katrina. Thus, even though a qualified individual is required to have sustained an economic loss, Katrina distributions are permitted without regard to the qualified individual's need and the amount of the distribution is not required to correspond to the amount of the economic loss suffered by the qualified individual.