The Housing and Economic Recovery Act of 2008 is designed primarily to help troubled borrowers and their lenders, including Fannie Mae and Freddie Mac. But it also provides incentives and tax breaks for certain homebuyers, homeowners, businesses and real estate investors, as well as for GO Zone residents and investors.
Breaks for homebuyers and owners
The Housing act contains two significant home-related tax breaks. Even if they won't help you, they may help your children or parents:
1. Credit for first-time homebuyers. A refundable credit equal to 10% of the purchase price of a principal residence is now available to first-time homebuyers. Under the act, a first-time homebuyer is someone who has had no ownership interest in a principal residence in the United States during the prior three-year period. There are certain other limitations as well.
This tax break is generally available for purchases on or after April 9, 2008, and before July 1, 2009. The maximum credit is $7,500 and starts to phase out for joint filers with adjusted gross incomes (AGIs) exceeding $150,000 ($75,000 for single filers). It's completely eliminated for joint filers with AGIs exceeding $170,000 ($95,000 for single filers). Note, however, that the taxpayer must repay the credit received, generally over a 15-year period but with no interest. So the break is really more of an interest-free loan from the government than a genuine tax credit.
2. Additional standard deduction for property taxes. For 2008, the standard deduction for married couples filing jointly is $10,900 ($5,450 for singles). The Housing act provides an additional standard deduction equal to the lesser of 100% of state and local property tax paid or $1,000 for joint filers ($500 for single filers).
This tax break will benefit many older homeowners who are close to paying off (or have already paid off) their mortgages. Because such taxpayers have little or no mortgage interest expense, they often don't have enough deductible expenses to exceed the standard deduction and warrant itemizing. As a result, before the act, they received no federal tax break for their property tax costs. For taxable years beginning in 2008, however, they can offset some or all of these costs with the additional standard deduction.
Breaks for businesses and real estate investors
Corporate taxpayers can take advantage of a provision that allows them to accelerate their alternative minimum tax (AMT) and research & development (R&D) credits in lieu of taking the bonus depreciation available under the Economic Stimulus Act of 2008. The bonus depreciation amount is equal to 50% of an eligible asset's basis, generally if the property is acquired this year. Eligible property includes:
n Tangible property with a recovery period of 20 years or less,
n Computer software purchased by the business,
n Water utility property, and
n Qualified leasehold improvement property.
Under the Housing act, corporations that elect to accelerate AMT or R&D credits will enjoy a credit limit increase equal to 20% of the bonus depreciation for which they are otherwise eligible. (Credits can be more valuable than depreciation deductions because they reduce your tax bill dollar-for-dollar, rather than just reducing the amount of income that is taxed.)
The allowable credit is capped at the lesser of $30 million or 6% of an amount that is determined using a somewhat convoluted formula based on certain prior R&D credit carryforward amounts and certain minimum tax credits. The provision is generally effective for property placed in service after March 31, 2008, (so long as no written purchase contract existed at that time) and before Jan. 1, 2009. In some circumstances, though, the deadline is extended and the credit will be available for assets placed in service as late as Dec. 31, 2009.
The act also contains provisions that may affect real estate investors and developers. For example, it expands the availability of certain low-income housing tax credits, simplifies the rules for tax-exempt housing bonds and provides some extensive reforms related to Real Estate Investment Trusts (REITs).
Breaks for GO Zone residents and investors
The Housing act allows victims of Hurricanes Katrina, Wilma or Rita to adjust casualty loss deductions claimed for their principal residences to reflect subsequently received grant payments to cover uninsured losses caused by the hurricanes. Taxpayers who receive a payment for losses previously claimed would usually have to recognize the income, and be liable for the additional income tax, in the year the payment is received. The act allows for the taxpayer instead to file an amended return for the year the loss was incurred, with the reimbursement reducing – but not below zero – the loss.
While typically filing an amended return would lead to an assessment of interest and, potentially, penalties, the act provides for a waiver of all penalties and limits the interest calculation to just one year of interest. To be eligible for the waiver, the taxpayer must pay the tax and interest within one year of filing the amended return.
In addition, Gulf Opportunity (GO) Zone property can now be placed in service in years after 2007 or 2008 and continue to qualify for special GO Zone first-year bonus depreciation (equal to 50% of the basis of qualified GO Zone property).
The Housing act generally extends these deadlines to Dec. 31, 2010. Even if you don't reside in the GO Zone, if you own property there you may benefit from the extension of tax breaks related to those investments.
Revenue-raising provisions
The Housing act also includes a few revenue-raising provisions. For example, under the act, the home sale gain exclusion won't apply to the extent that it relates to the nonqualified use period of a residence. Normally joint filers can exclude up to $500,000 ($250,000 for single filers) of gain on the sale of a principal residence if they meet certain tests, including a use test. Generally, the nonqualified use period is any period after Jan. 1, 2009, that the property is not used as the taxpayer's principal residence.
The change will affect taxpayers such as those who own a vacation home or rental property, convert it to use as a principal residence for the required time, and then sell it at a gain. Part of the gain in these situations will now be taxable.
Find out exactly how you're affected
Determining exactly how the Housing and Economic Recovery Act of 2008 will affect your tax liability – and what you should do to take full advantage of the act – can be tricky. So if you have any questions about this or other tax laws, contact Baden, Gage & Schroeder's Tax Director, Jeffrey A. Sanderson, CPA, at 260-969-2535 or jsanderson@badencpa.com.
