New Housing Bill Has Something for Everyone
July 28, 2008 was a good day for homeowners and would-be homeowners. On that day, President Bush received The Housing Assistance Act of 2008 (T-HAT). T-HAT has provisions designed to both spur the housing market and provide relief to beleaguered homeowners reeling from higher payments as their adjustable rate mortgages re-price.
First Time Homebuyers
T-HAT gives first-time homebuyers a temporary credit equal to 10 percent of the purchase price of their home, not to exceed $7,500 ($3,750 for married persons filing separately). The credit is available for homes purchased on or after April 9, 2008 and before July 1, 2009. The credit contains a phase out range beginning at $75,000 in adjusted gross income for single filers and $150,000 for joint filers.
Although called a credit, the maximum $7,500 is technically an interest free loan that must be repaid ratably over fifteen years. Qualifying homebuyers will be allowed to take the credit against their taxes in the year of purchase; however, if a first-time homebuyer makes a qualifying purchase in 2009, they will be allowed to amend their 2008 return to claim the credit. Adding to the stimulating nature of this “credit” is the fact that it is refundable. Thus, to the extent that the credit exceeds your tax liability, you would receive a refund.
A “first-time homebuyer” is a person who has not owned a principal residence in the three years prior to the purchase qualifying for the credit. This opens the very real possibility that a renter who owns a vacation home could qualify for the credit. Do not, therefore, assume that ownership of any dwelling automatically disqualifies you for the credit.
Unmarried taxpayers who purchase a home together cannot each claim the $7,500 credit. Rather, they must allocate $7,500 between themselves.
The law requires repayment to begin two years after the credit is allowed. Thus, if a credit is allowed for 2008, repayment will begin in 2010. If you sell the home before fully repaying the $7,500 credit, the full amount will be come due, but only to the extent of any gain recognized on the sale of the home. While the repayment aspect essentially means the credit is a loan, it nonetheless does save the homebuyer around $4,000 over its term if the full credit is used.
Homeowners who do not itemize deductions will receive an additional standard deduction in 2008 equal to the amount of real estate tax paid or $500 ($1,000 for joint returns). This provision will provide assistance to those who have paid off their mortgages or lower-income homeowners whose overall itemized deductions do not exceed the standard deduction.
T-HAT provides substantial relief to homeowners who face foreclosure due to the repricing of their adjustable rate mortgages. In some cases, increased interest rates on ARMs have made the monthly payments unaffordable. T-HAT assists these homeowners by making government programs that provide lower-rate loans available to refinance mortgages. For many years, state and local governments have been issuing mortgage revenue bonds designed to help first-time homebuyers. Typically, a governmental agency issues tax exempt bonds and utilizes the proceeds to fund low interest loans for qualifying first-time homebuyers. By definition, these funds were not available to homeowners seeking to refinance debt. The new law expands the availability of these funds to borrowers looking at an unaffordable interest rate reset on their existing mortgages. The law also allows states to issue an additional $11 billion in bonds for 2008.
The provisions in T-HAT reducing tax collections are fully offset by revenue raisers amounting to $18.5 billion. For the most part, the revenue raisers affect a narrow band of taxpayers. One measure, however, has the potential to affect a large number of individuals. Under current law, home sellers are allowed to exclude up to $250,000 ($500,000 for joint filers) in gain recognized on the sale of their primary residence. The definition of “primary residence” allows a taxpayer to use the house for only two of the prior five years as a primary home, yet exclude up to $250,000 ($500,000) in gain.
Under the new law, any gain attributable to the period in which a home is not the taxpayer’s primary residence (non-qualifying use period), cannot be excluded from income. For example, assume Frank purchases a $275,000 home on January 1, 2009 and uses it as a vacation home for the first two years. Beginning in the third year, he converts it to his primary residence and on January 1, 2014, he sells it for $550,000. Only 60% (3 years primary residence use) or $165,000 in gain can be excluded. The portion of gain related to the period the home was a vacation property (or rental property) is taxable as a long-term capital gain.
T-HAT provides substantial relief to a wide range of taxpayers as well as providing incentives to help stimulate the U.S. housing industry. If you are a first-time homebuyer or are facing an interest rate reset, T-HAT could provide substantial benefits. Give us a call and let’s discuss whether the new housing act will benefit you.
Have a great August.