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The American Housing Rescue And Foreclosure Protection Act Of 2008

The American Housing Rescue And Foreclosure Protection Act Of 2008

President Bush signed into law on July 30th  what is being referred to as The Housing Act. The legislation intends to prop up the government-sponsored entities (e.g. Fannie Mae) and help struggling mortgage lenders by slowing the rate of home foreclosures.

As is common with legislation there are additional items tacked onto the Bill signed by President Bush. Let’s do a little Q&A to see what the changes are all about.

(1) HOME BUYER TAX CREDIT
QUESTION: What is it?

ANSWER: First of all it’s not a true credit. On the front end it works like one but it has to be repaid on the back end. Essentially it’s a loan for qualified buyers of principal residences.

QUESTION: Who’s a qualified home buyer?

ANSWER: This is someone who buys a principal residence after April 8, 2008, and before July 1, 2009. S/he may not have owned a principal residence in the U.S. during the 36 month period ending on the date of the home purchase. If s/he is married then his/her spouse must pass this test as well.

QUESTION: How much is the credit?

ANSWER: It’s the lesser of (1) $7,500 (for those filing joint returns) or (2) 10% of the home purchase price. Just about everyone will take the $7,500 because the purchase price would have to be below $75,000 for the “10% of purchase price rule” to kick in.

QUESTION: How does this impact AMT?

ANSWER: It doesn’t. If you’re subject to the Alternative Minimum Tax you cannot use the credit to reduce the AMT liability.

QUESTION: It has to be an “arms length” transaction, right?

ANSWER: Yup. No loopholes allowed. Buying the home from a spouse, parent, grandparent, child, grandchild, etc. is a no-no.

QUESTION: What if I build a home?

ANSWER: That’s fine – the purchase date is considered to be the date you move in.

QUESTION: Anything else to know about it?

ANSWER: Lots. First, the credit is refundable meaning if it wipes out the entire federal income tax liability and there’s a remainder then Uncle Sam will send a check for the difference. Second, if the purchase is made in 2009 prior to the deadline then it can be treated as a 2008 purchase. This is an interesting situation. Typically the earlier the credit is used the greater the financial benefit. However the uncertainty over November’s elections may lead to a greater benefit if the credit is used for tax year 2009 should the Bush tax cuts be repealed. Finally, the credit is subject to phase out based upon income levels. An unmarried taxpayer earning $75,000 of adjusted gross income (“AGI”) will see a gradual phase out of the credit until his/her income reaches $95,000 at which point the credit is reduced to $0. For married taxpayers the phase out begins at AGI of $150,000. The credit is reduced to $0 once AGI reaches $170,000.

QUESTION: What was meant by suggesting the credit is really a loan?

ANSWER: Well, exactly that. The credit has to be repaid (without interest) over a 15 year period beginning with the second year after the year the credit was claimed.

QUESTION: How does that work?

ANSWER: Let’s say a taxpayer qualifies for a $6,000 credit for tax year 2008. Spreading it across 15 years ($6,000/15) means $400 is due beginning in 2010 and will continue each year through and including 2024. If the home is sold or no longer used as the principal residence prior to expiration of the 15 year period then the balance of the credit would have to be repaid immediately.

(2) PROPERTY TAX DEDUCTION
QUESTION: I already get a property tax deduction. Is this a new one?

ANSWER: Yes but it is only for 2008 and applicable only to those who currently do not itemize their deductions.

QUESTION: Rats! Just about anyone owning a home itemizes their deductions. Who benefits?

ANSWER: No one – at least not in a material sense. The deduction is a mere $1,000 (or $500 for single taxpayers).

(3) PROPERTIES CONVERTED INTO PRINCIPAL RESIDENCES
QUESTION: If I have a rental property or vacation home and decide I want to make it my primary residence, can I qualify for the home sale exclusion?

ANSWER: Yes and no. Prior to The Housing Act a rental property or vacation home could be converted to a principal residence. After 24 months the home could be sold and qualify for the federal home sale gain exclusion of $500,000 (or $250,000 for unmarried taxpayers). Of course any depreciation would have to be recaptured but it’s a small price to pay. After passage of The Housing Act the strategy will still work but gets tougher after tax year 2008.

QUESTION: Why?

ANSWER: Beginning in 2009 any years where the property is used as a rental or vacation home will negatively adjust the home sale exclusion even if the two year principal residence rule is met.

Let’s say I own a rental property that I bought on 1/1/98 for $200,000. On 1/1/13 I convert it to my principal residence and then sell it on 1/1/15 for $700,000 giving me a profit of $500,000.

Under the old rules (and excluding the recapture of depreciation for the sake of simplicity) my wife and I could exclude the entire $500,000. Under the new rules I would have to pay tax on about $117,650 of the $500,000 capital gain.

QUESTION: What’s the math on that?

ANSWER: The total ownership period is 17 years but the 4 years it was a rental property after 2008 (1/1/09 – 12/31/12) work against me. The gain attributable to these years cannot be excluded. I take my rental years and divide by my total ownership years (4/17) and multiply by the gain ($500,000) and end up with roughly $117,650 of capital gains on which I will owe tax. The balance of the gain ($500,000 – $117,650) would be excluded.

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