September, 2008 Tax Newsletter

Highlights of the Housing Assistance Tax Act of 2008

At the time the Housing and Economic Recovery Act of 2008 (which contained the Housing Assistance Tax Act of 2008) was signed by President Bush on July 30, 2008, I had prepared my Tax Newsletter article for August,   Therefore, I am making it the topic of  this month’s newsletter.  This article will address the two major tax breaks and one major tax detriment contained in the bill.

Vacation or Second Homes

I will start with the bad news.  Under prior law there was a tax-saving strategy called “home hopping”  Taxpayers can exclude up to $250,000 ($500,000 if filing jointly) of gain on the sale of their residence so long as they owned the home and lived in it as their primary residence for at least two of the five years prior to the sale.  Under this rule people with rental or vacation homes can move in for two years, sell it, and then move back into their primary residence.  Conversely, they could live in their primary residence for two years, sell it,  and then move into the second residence.   As long as they lived in each residence for two of the five years prior to its sale  they could exclude up to $250,000 ($500,000) of gain on both residences.

Under the new law, effective January 1, 2009, taxpayers cannot exclude gain from the sale of a home that is allocated to periods of “nonqualified use”.  This refers to any period after 2008 when the property isn’t used by the taxpayer or his spouse (or former spouse) as a primary residence.

As an example, if the home is bought in 2009 and the taxpayer owned it for five years, but lived in it for just two, only 40% of the gain up to $250,000 ($500,000) can be excluded.  Under prior law the entire exclusion would have been available.

Tax Credit for First-time Homebuyers

This tax “break” could more aptly be called  “What Congress Gives, Congress Takes Away”.  The law provides for a tax credit for first time home buyers equal to the lesser of 10% of the purchase price of a home, up to $7,500 ($3,750 for married couples filing separately).  A “first time homebuyer” is a person who has not had an ownership interest in a principal residence during the three-year period before the new home is purchased.  So far, so good, right?  But wait!  In reality the credit amounts to an interest-free loan.  It must be paid back in equal installments over a 15- year period, starting two years after the year of purchase.  One caveat – if a taxpayer sells or no longer uses the home as a principal residence before repaying the credit, the unpaid balance becomes due in the year the home is no longer used as the principal residence

There are other restrictions, as well.  The credit phases out for married couples filing jointly with adjusted gross income (AGI) between $150,000 and $170,000 and for single taxpayers with AGI between $75,000 and $95,000.  In addition, the credit is temporary.  It is only available for homes purchased April 9, 2008 through July 1, 2009.  Moreover, the credit is not given at the time of closing.  As with other tax credits, it is taken on the taxpayer’s 2008 or 2009 tax return, although a first-time buyer who purchases a principal residence in 2009 after filing a 2008 return has the option of filing an amended 2008 return to claim the credit.

One-year Real Estate Tax Deduction for Non-Itemizers

This break does not have any hidden agendas.  It gives non-itemizers a limited deduction for state and local real estate taxes they pay in 2008.  The deduction is the lesser of the amount of the tax or $500 ($1,000 for married couples).