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Federal Tax Incentives in Renewal Communities

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The 2000 Community Renewal Tax Relief Act authorized the creation of the Renewal Community (RC) Initiative, designed to stimulate economic development in the nation’s most distressed communities. Through this initiative HUD designated 40 of the most distressed communities as RC communities, and Congress provided them with more than $5 billion in tax incentives that will last through December 31, 2009.

The most interesting elements of this program for commercial brokers and investors are:

  • Under certain circumstances, a “Commercial Revitalization Deduction” allows up to $12 million of the cost of a new or substantially rehabilitated building to be written off over a 10-year period, or 50% of the total can be written off during the 1st year of service. This allocation must be applied for, but if received, can mean substantially increased cash flow. Example: a $10 million commercial property with land value of $1 million and improvements valued at $9 million would have increased cash flow of more than $207,000 each year.
  • The property can be sold for cash after five years, and the capital gains tax rate is 0%. No exchange is required.

For further information, see IRS Publication 954 (Tax Incentives for Empowerment Zones and Other Distressed Communities), or Internal Revenue Code Section 1400 E-J.

Useful web site:
http://www5.hud.gov/urban/tour/statestour.asp

(Includes a map with the different types of targeted federal zones (Empowerment Zone, Enterprise Community, and Renewal Community), along with links to each of the 40 Renewal Communities.

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