Recapture Rules

Recapture Rules for GO Zone Property in a 1031 Exchange

Gulf Opportunity Zone Property (GO Zone Property) is property located in the Gulf Coast states damaged by hurricanes Katrina, Rita and Wilma in 2005. The Gulf Opportunity Zone Act of 2005 provided for 50% bonus first year depreciation on qualified rehabilitation expenditures of GO Zone property. However, a disposition of the property is subject to recapture of the bonus depreciation under various conditions, including certain 1031 Exchanges.

Notice 2008-25 provides the following rules for like-kind exchanges and involuntary conversions of relinquished property that is GO Zone property:

There is no recapture if the replacement property is GO Zone property in the hands of the taxpayer.

There is recapture if the replacement property isn't GO Zone property in the hands of the taxpayer and isn't substantially (80%) used in the GO Zone or in the active conduct of a trade or business by the taxpayer in the GO Zone. The amount recaptured and the resulting basis increase under Notice 2008-25, Sec. 3.02(1) are determined before the application of Code Sec. 1031, Code Sec. 1033, Code Sec. 1245, or Code Sec. 1250.

There is no recapture if the replacement property isn't GO Zone property in the hands of the taxpayer but is substantially used in the GO Zone and in the active conduct of a trade or business by the taxpayer in the GO Zone. But, if after the acquisition of the replacement property, that property ceases to be substantially used in the GO Zone or in the active conduct of a trade or business by the taxpayer in the GO Zone, there is recapture. Similarly, there is recapture if, after the acquisition of the replacement property, that property is transferred by the taxpayer in another exchange or another involuntary conversion and the later replacement property isn't GO Zone property in the hands of the taxpayer and isn't substantially used in the GO Zone or in the active conduct of a trade or business by the taxpayer in the GO Zone. (Notice 2008-25, Sec. 3.02(3))

The recapture year is the first tax year in which the replacement property (or later replacement property) ceases to be substantially used in the GO Zone or in the active conduct of a trade or business by the taxpayer in the GO Zone. The depreciation of both the relinquished property and replacement property is taken into account in determining the benefit derived from claiming the GO Zone bonus depreciation deduction. (Notice 2008-25, Sec. 3.02(3))