The Housing and Economic Recovery Act of 2008

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Congress recently passed, and President Bush has signed into law, a $300 billion housing bill to help restore confidence in the housing market. The new law includes more than $15 billion in tax incentives, as well as some important revenue raisers.

The downward spiral in home sales and home values has many Americans worried. Home sales have hit a 10-year low, gasoline prices are still high, and easy credit, which fuels the economy, is drying up. While the news is troubling, there is a bright spot. Congress has passed a sweeping housing bill (the Housing and Economic Recovery Act of 2008, P.L. 110-289). You have no doubt heard in the media about how this new law overhauls government regulation of Fannie Mae and Freddie Mac and authorizes the U.S. Treasury to help fund these entities, if needed.

Let's take a look at some of the major incentives - and revenue raisers - in the housing act. As always, please call or e-mail us if you have any questions.

Tax Incentives

First-time-homebuyer tax credit. One tax incentive in the new law, the first-time-homebuyer tax credit, has been getting a lot of attention in the news; but, be careful. The credit, while generous, is essentially an interest-free loan from the government. Taxpayers who take the credit, which equals 10 percent of the purchase price (up to $7,500 for single individuals and married couples filing jointly; $3,750 for married individuals filing separate returns), must repay the credit. They will have 15 years to repay the credit in equal amounts. If a taxpayer sells his or her home before the end of the 15-year period, he or she will likely have to immediately repay any outstanding balance. Important income thresholds also apply. Additionally, the credit is temporary and applies to homes purchased on or after April 9, 2008, and before July 1, 2009. There are also complex rules about who can take it, when they can claim it and so on. Please contact our office if you have any questions about this potentially valuable but complicated new credit.

Property deduction for non-itemizers. Significantly less complicated is a new standard property tax deduction for taxpayers who do not itemize deductions. Before the new law, only itemizers could deduct state and local property taxes. The housing act gives non-itemizers a limited deduction for state and local property taxes by increasing the amount of their standard deduction by the lower of the amount of property taxes they paid or $500 ($1,000 for a married couple filing jointly). If you have paid off your mortgage and no longer itemize, you might benefit from this new deduction. As now written, however, this is a one-year shot in the arm, available only for taxes paid in 2008.

Borrowers. Many homeowners are trying to refinance mortgages that offered low teaser rates but whose rates have now skyrocketed. The new law authorizes states to issue $11 billion more in mortgage revenue bonds for 2008 and allows qualifying subprime borrowers to use their state's mortgage revenue bond program to refinance into a loan with a more favorable rate. The housing bill also creates a new program called "HOPE for Homeowners" to help homeowners refinance their mortgages. Both provisions are temporary.

Businesses. The Economic Stimulus Act of 2008 included bonus depreciation to encourage businesses to increase investment. However, companies in a loss position cannot take advantage of bonus depreciation because they do not have any taxable income against which to take the deductions. The housing act allows taxpayers (corporations) to use accumulated alternative minimum tax (AMT) credits, as well as research and experimentation tax credits, to make investments that would qualify for bonus depreciation, if the taxpayers were profitable. The new law also dramatically changes the information-reporting requirements of banks and other processors of merchant payment-card transactions. Starting in 2011, they will be required to report a merchant's annual gross payment-card receipts to the IRS and the merchant. Congress believes that enhanced information reporting will help close the $300 billion tax gap, the difference between what taxpayers owe and what they actually pay.

Home-sale exclusion. The home-sale exclusion is one of the most popular tax breaks in the Internal Revenue Code. A married couple filing jointly can generally exclude up to $500,000 in gain (single individuals up to $250,000). Before the new law, if a second home becomes a principal residence, after two years, the owner could sell it and exclude up to $250,000 in gain from their income or up to $500,000 for couples filing jointly. The housing act closes what some call a "loop hole." The new law 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. As good news to those who have already owned property for a while and have seen it appreciate, non-qualifying use before the January 1, 2009, effective date of the provision is not used in the calculation; neither are periods after a qualified use of the property or temporary absences of less than two years.

REITs. A real estate investment trust (REIT) holds passive investments in real property equity and mortgages. The housing act clarifies some of the complex rules applicable to REITs and modifies the definition of gross income for purposes of the REIT income tests. Congress also authorized the IRS to further modify the definition of gross income for purposes of the tests.

Down-payment assistance. Seller-funded down-payment-assistance programs provide cash assistance to homebuyers who cannot afford to make the minimum down payment or pay the closing costs involved in obtaining a mortgage. Despite their popularity, these programs have been criticized for helping to inflate home prices. In 2006, the IRS ruled that organizations that provide seller-funded down-payment assistance to home buyers do not qualify as tax-exempt charities. The new law bans seller-funded down-payment-assistance programs.

Military personnel. The housing bill includes many provisions to help military personnel on active duty and veterans avoid foreclosure. Under the new law, service members and veterans are protected from foreclosure for nine months following a period of military service (rather than the current 90 days). Congress also made the VA home-loan program more attractive and provided funding for disabled veterans to make accommodations in their homes for their disabilities.

Affordable housing. Tax-exempt housing bonds and the LIHTC help to fund the construction of affordable housing units. The rules for tax-exempt housing bonds and the LIHTC are extremely technical. The housing act simplifies these rules and makes other changes, such as excluding tax-exempt interest on certain housing bonds from being a preference item for AMT purposes. The housing act also allows taxpayers to use the LIHTC and the rehabilitation tax credit to offset AMT liability. Congress also enhanced the rehabilitation tax credit and some special tax breaks for taxpayers in the Gulf Opportunity Zone.

Information provided by the CCH Group.