UPDATE: On Friday, July 2, President Barack Obama signed into law the Homebuyer Assistance and Improvement Act of 2010, legislation designed to give homebuyers extra time to get financing and finish paperwork and still qualify for the homebuyer tax credit.
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With Congress headed out for a Fourth of July recess until July 12th, the legislators have quickly passed a pared down bill that focuses on fixing problems with the homebuyer credit, just in the nick of time. The Homebuyer Assistance and Improvement Act of 2010 (HR 5623) passed the House by a vote of 409 to 5, on June 29. The Senate passed it unanimously on June 30, and the bill is now on its way to be signed by President Obama.
Background on the Homebuyer Credit
The homebuyer credit is calculated based on the purchase price of the home. The credit is 10 percent of the purchase price, with a cap of $8,000 credit for first-time homebuyers and $6,500 for long-time homebuyers. A first-time homebuyer is defined by the law to include anyone who hasn't owned a home in the three year period preceding the purchase of the new home. For married couples buying a home, both spouses must meet the three-year rule to be considered as first-time homebuyers. A long-term homebuyer, also referred to as a repeat buyer or a move-up homebuyer, is defined by the law as someone who has owned and lived in the same home for at least five of the eight years preceding the purchase of the new home. For married couples buying a home, both spouses must meet the five-year/eight-year test to be considered as repeat buyers.
To qualify for the credit, taxpayers must have entered into a contract for the home purchase before May 1, 2010 and the contract must have closed by June 30, 2010. The problem arose when – according to the House Ways and Means Committee – an estimated 180,000 taxpayers initiated home purchase contracts which did not close by June 30, due to delays in the financial sector. The National Association of Realtors said the expired deadline effected homebuyers in every state, from 390 in Wyoming to approximately 17,700 in California.
Many in Congress pushed to extend the closing deadline from June 30, 2010 to December 31, 2010, but the prohibitive cost of this extension made it an insurmountable issue. Instead, Congress agreed on a compromise. The Homebuyer Assistance Act extends the closing date requirement to September 30, 2010. It does not modify the requirement that contracts must have been entered into before May 1, 2010.
The cost of this new legislation is estimated to be $140 million, which is intended to be covered by three provisions also included in the new bill. Here is how Congress plans to pay for the cost:
- Modification of the Travel Promotion Act of 2009. The original bill included a deadline of 2010 to transfer initial set-up fees for the Department of Homeland Security (DHS) Travel Promotion Board. The new law extends this deadline to 2011. In addition, the Travel Promotion Board has an additional year (from 2011 originally to 2012) to begin to match funds that DHS transfers to the Board. Finally, the original bill included a sunset on the fee collection period of 2014. The new bill extends that sunset to 2015. These changes will raise an estimated $95 million over a ten year period.
- Bad check penalties on checks to the Internal Revenue Service. Currently, taxpayers who give the IRS a check or money order that has insufficient funds to cover it must pay a penalty equal to 2 percent of the amount of the check or money order. If the original amount due is less than $1,250, the penalty is the lesser of $25 or the amount of the original amount due. The new law modifies this practice by extending it to all commercially acceptable forms of payment. In other words, electronic payments made to the IRS that are not actually paid due to insufficient funds will also be subject to these penalties. This change begins with the date of enactment of the new bill and is expected to raise $48 million.
- Fraud surrounding the use of the home buyer credit by prisoners. This is a problem that has gotten much attention in recent days, thanks to a report by the Treasury Inspector General for Tax Administration. That report showed that 4,608 prisoners had filed claims for the homebuyer credit. The IRS failed to stop 1,295 of those claims from being paid, costing taxpayers $9.1 million in erroneous credits. By tightening this money leak, Congress expects to raise $6 million.
What else is Congress up to?
The House also passed two other tax-related bills this week. The Firearms Excise Tax Improvement Bill of 2010, and the Airport and Airway Extension Act of 2010, Part II. The airport bill is a stopgap measure, funding the Federal Aviation Administration through August 1, 2010. A long-term bill is in process. The Senate tabled the firearms bill, but passed the airport bill, which will now go to the president and is expected to be signed.
As the Senate prepares to adjourn until July 12 for the Fourth of July recess, two Senators introduced a bill to substitute for the Jobs bill which they have not been able to pass. Senate Finance Committee Chair Max Baucus (D-MT) and Entrepreneurship Committee Chair Mary Landrieu (D-LA) are sponsoring the Small Business Jobs Act, which is intended to provide loans and tax relief to small businesses.
Here is a list of the issues addressed in this proposed legislation, which is expected to reach resolution in July:
- 50% bonus deprecation will be extended through 2010.
- Section 179 depreciation will be raised to $500,000 for 2010 and 2011, with a phase-out threshold of $2 million.
- 100% exclusion of capital gains on small business stock acquired after February 17,2009 and before January 1, 2011.
- The general business credit will be expanded for small businesses, including a five year carryback.
- A reduced 5-year holding period for S corporation property with built-in gains; and
- Relief of penalties for failing to disclose reportable transactions.