Hurricane GO zones: an update on relevant tax provisions.

• Author: Goldsberry, Eddie

The widespread devastation left in the wake of hurricanes has resulted in numerous tax provisions aimed at revitalizing and rebuilding the affected areas. Congress passed the Gulf Opportunity Zone Act of 2005, P.L. 109-135 (the GO Zone Act), in response to Hurricane Katrina and then revised it as Hurricanes Rita and Wilma wreaked havoc on the already battered Gulf Coast. Two years after its passage, the GO Zone Act is still relevant, notably the provisions relating to business property and issues such as involuntary conversion rules, nonrecognition of gain principles, and depreciation.

One of the most significant changes to current tax laws is in the area of involuntary conversions. Congress increased the time to acquire or construct replacement property from two to five years for anyone located within the Hurricane Katrina disaster area (Katrina Emergency Tax Relief Act of 2005, P.L. 109-73, Section 405). The five-year period begins from the date a taxpayer first receives insurance proceeds, not when the full amount is received. Should a taxpayer need additional time--for example, if the receipt of all proceeds is crucial to purchasing replacement property--he or she may file an application for extension with the IRS with an explanation as to why additional time is needed. A taxpayer may acquire replacement property anywhere within the Hurricane Katrina disaster area. It is not limited to the same location where the damage occurred in order to avoid gain recognition on the conversion. For a complete listing of counties and parishes located in the Katrina, Rita, and Wilma GO Zones, see IRS Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma.

As with any property that has been involuntarily converted, the taxpayer does not have to recognize a gain if the proceeds are used to purchase qualified replacement property. This provision encompasses both partially and completely destroyed property. Special consideration should be given to having adequate records of the items destroyed. The IRS has allowed separate property to be treated differently when applying the nonrecognition rules. This may be helpful when determining if any gain or loss should be recognized on the property. Involuntary conversion and nonrecognition of gain rules generally apply to qualified GO Zone property, with a few notable exceptions. First, if an uncompensated Sec. 1231 loss occurs, Congress has allowed the loss to be eligible for...