Liberty Zone Special Depreciation Allowance for the September 11 Terrorist Attacks

Congress created special tax breaks for those areas in New York that were affected by the September 11, 2001 terrorist attacks. The Liberty Zone Allowance is a special deprecation allowance by the IRS.

The area of New York City south of Canal Street was substantially damaged in the September 11, 2001 terrorist attacks. After the attacks on New York, Congress created a new “Liberty Zone” in New York City with an accompanying series of tax breaks for businesses operating in the area. One of these tax benefits was an increased section 179 deduction of 30% for new property investments in the Liberty Zone.

New York Liberty Zone Area

The New York Liberty Zone is the area located on or south of Canal Street, East Broadway (east of its intersection with Canal Street), or Grand Street (east of its intersection with East Broadway) in the Borough of Manhattan in the City of New York, New York.

Liberty Zone Special Depreciation Allowance Requirements

To be qualified Liberty Zone property the property must have been acquired by purchase after September 10, 2001, and there must not have been a binding written contract for the acquisition in effect before September 11, 2001. The property also must be placed in service for use in your trade or business or for the production of income by January 1, 2007 (January 1, 2010, in the case of qualifying nonresidential real property and residential rental property).

Liberty Zone Special Depreciation Allowance example: On October 1, 2001, you bought and placed in service in your business, which is in the Liberty Zone, qualified Liberty Zone property that cost $150,000. You did not elect to claim a section 179 deduction. You can deduct 30% of the cost $45,000 as a Liberty Zone special depreciation allowance for 2001. You use the remaining $105,000 of cost to figure your regular depreciation deduction for 2001 and later years.

Qualifying Property for Liberty Zone Special Depreciation Allowance

The following types of property can qualify for the New York Liberty Zone property :

      1. Property that is depreciable under MACRS and has a recovery period of 20 years or less.
      2. Computer software which is depreciable using the straight-line method over 36 months.
      3. Water utility property.
      4. Certain real property to the extent it constitutes a rehabilitation or replacement of property destroyed or condemned as a result of the September 11, 2001, terrorist attack.

Recapture the Liberty Zone Special Depreciation Allowance

If you used the Liberty Zone Depreciation Allowance and subsequently sold your property, you are required to recapture the depreciation amount you used (unless you elected not to claim it).