The Housing and Economic Recovery Act of 2008, designed to reduce foreclosures, strengthen the housing market and shore up lending institutions will also change the amounts many taxpayers owe to the IRS, according to CCH. The Act passed the House last Wednesday, July 23, and the Senate is scheduled to follow suit shortly, with assurance from the White House that President Bush will sign the measure.
Some of the tax provisions in the measure are aimed at raising revenue to pay for the bailout of the housing market. Other tax breaks are aimed at encouraging investment in low-income housing. But sooner or later, ordinary homeowners and would-be homeowners might see the effects of three provisions on their Form 1040.
"Some homebuyers and current homeowners stand to benefit from the bill, but others will help pay for it with higher taxes down the line," said Mark Luscombe, JD, CPA, CCH principal tax analyst.
Some homebuyers will benefit from the provision of a refundable first-time homebuyer credit, intended to stimulate demand. The credit is available to those who purchase a home on or after April 9, 2008 and before July 1, 2009, and who haven't had "ownership interests" in a principal residence during the three prior years. The credit is 10 percent of the purchase price or $7,500, whichever is less – but for married people filing separately the $7,500 limit becomes $3,500. Unmarried people who jointly purchase a home can divide the $7,500 credit, but how the division is to take place is left to IRS regulation-writers.
The credit begins to phase out at the $150,000 income level for joint filers ($75,000 for other filers) and is not available for joint filers with income above $170,000 ($95,000 for other filers). It's also not available to nonresident aliens, those who qualify for a similar District of Columbia credit or those whose financing comes from tax-exempt mortgage revenue bonds.
Since the credit is refundable, it has the potential not only to wipe out a taxpayer's obligation, but even create a payment from the Treasury.
Quick Tax Relief, But Repayment Down the Line
"Many times, people don't get much help on their tax returns in the year they purchase a home, because they have deductible interest and taxes for only part of a year, and they might not even qualify to itemize," Luscombe said. "This provision gives them additional first-year tax help, and if they adjust their withholding to reflect the credit, they can get that help quickly."
Taxpayers who purchase homes in 2009, before the July 1 cutoff, also have the option of treating the purchase as taking place on December 21, 2008, and filing an amended 2008 return to claim the credit.
"One way or another, those who qualify can get some quick tax relief and quite possibly a check from the government," Luscombe said.
Beginning in the second tax year after the purchase, though, homebuyers must begin repaying the credit. The interest-free repayment is scheduled over a 15-year period. If the homeowner sells the home before then, the entire repayment is due, but the amount to be repaid cannot exceed the gain realized on the sale of the home. If the homeowner dies before repayment is complete, the remaining amount is cancelled.
Additional Deduction for Non-itemizers
A second provision permits homeowners who don't itemize to take up to $500 ($1,000 for joint filers) of their state and local property taxes as an additional standard deduction on their 2008 return.
"Mortgage interest is often the key to taking itemized deductions," Luscombe noted. "With high interest payments, people are able to deduct additional items such as state and local taxes and charitable contributions."
People who own their homes outright, or whose mortgage payments are low or consist mainly of principal rather than interest, may not qualify for itemizing.
"This provision allows them a deduction to defray some of the costs of home ownership, but just for one year," Luscombe said.
The deduction is taken as part of the standard deduction, rather than an "above-the-line" deduction that reduces adjusted gross income.
"This means that phaseouts tied to adjusted gross income won't be affected," Luscombe observed.
Although it is in effect only for 2008 taxes, the provision may, of course, be extended. This happened to an itemized deduction for state sales tax and an above-the-line deduction for teachers' classroom expenses.
"It's sometimes difficult to take back a tax benefit," Luscombe noted. "As it stands today, however, it seems to be a kind of one-time stimulus payment."
Some Will Pay More
People who may be adversely affected by the bill are those who buy a vacation home, or one that they rent out, planning to make it their main residence at a later time. Currently, if a second home becomes a principal residence, after two years the owner can sell it and exclude up to $250,000 in gain from their income – or up to $500,000 for couples filing jointly.
But the bill pro-rates the exclusion between the time that a home is used as a principal residence and the total length of ownership, which includes any "non-qualifying" use as a rental or vacation property. Non-qualifying use before the January 1, 2009 effective date of the provision isn't used in the calculation, however. Nor are periods after a qualified use of the property or temporary absences of less than two years.
Suppose, for example, a couple buys a vacation home for $200,000 when they are in their 50s, sometime after this year. Ten years later, they retire, sell their old principal residence and make the vacation home their new principal residence. Fifteen years after that, in their 80s, they move to an assisted-living community and sell the home for $700,000, realizing a gain of $500,000. Under current law, the entire $500,000 gain would be excludable, but under the new provision, they could exclude only 15/25, or 60 percent of the gain from their income. So they would exclude $300,000 and include $200,000 on their return as a taxable long-term gain.
"These possibilities may complicate planning for people looking at a second home," Luscombe said. "It may also have the effect of depressing the market for vacation property – something that legislators may not have intended."
President Bush signed the Housing and Economic Recovery Act of 2008 into law on Wednesday, July 30, 2008.