On July 30, 2008 President Bush signed into law the “American Housing Rescue and Foreclosure Prevention Act of 2008” (H.R. 3221). It contains numerous provisions intended to curb questionable lending practices and strengthen the country’s housing market. Included in the law is the “Housing Assistance Tax Act of 2008,” which contains several tax benefits, including a tax credit of as much as $7,500 for certain homebuyers.

This provision allows a credit of as much as $7,500 ($3,750 for married filers of separate returns) for individuals purchasing a new principal residence. Unlike a deduction, which reduces income subject to tax, a credit reduces tax on a dollar-for-dollar basis. This credit is obtained by requesting it as part of the routine filing of a taxpayer’s individual 2008 or 2009 tax return (e.g. Form 1040). This benefit is “refundable,” meaning that even if the credit exceeds an individual’s tax, the excess will be paid to the taxpayer as a refund. The credit is accompanied by some interesting benefits and qualifications:

1. It applies to purchases made after April 8, 2008 and before July 9, 2009. However, a 2009 purchase may be reported on a 2008 tax return to accelerate the benefit. Amended returns may be utilized if necessary.
2. There’s a catch: The credit must be returned! Beginning with the second year following the purchase, the amount of the credit must be paid back to the IRS over a 15 year period. This benefit, therefore, more closely resembles an interest-free loan than a true credit. Also, if the property is sold during that period (or is no longer used as a primary residence), any unpaid balance is payable in full to the IRS, assuming the property is sold at a gain at least equal to the original credit amount.
3. In spite of the credit’s name, it is not necessary for a taxpayer to be a “first-time homebuyer” to qualify. Instead, one can qualify if he or she did not own a primary residence in the 3-year period preceding the current purchase.
4. The credit is not available to filers of joint returns who report adjusted gross income (“AGI”) of $170,000 or more or for other filers whose AGI exceeds $95,000. Only a partial benefit is available for joint filers and other filers reporting AGI of $150,000 and $75,000, respectively.
5. Property acquired by purchase from a relative or received by gift or inheritance does not qualify.

This bill also includes some assistance by increasing mortgage amounts that certain government agencies are allowed to lend homeowners in refinance situations.

Real estate taxes generally have been deductible only by individual taxpayers who itemize their deductions (by completing Schedule A of Form 1040). Beginning with 2008, property taxes also may be deducted by taxpayers who instead use the standard deduction. For those taxpayers, the deduction will be limited to the lesser of $500 ($1,000 for filers of joint returns) or property taxes actually paid.

Several other provisions are contained in the Act that, although significant, are likely to have somewhat of a less broad appeal. Among them:

1. Existing rules allow the tax-free gain from the sale of a primary residence (up to $500,000 for married taxpayers filing joint returns and $250,000 for others) under certain circumstances. In particular, the home must have been owned and utilized as the taxpayer’s primary residence for 2 of the 5 years preceding the sale. Under complex new rules, the exclusion will be reduced for periods of non-qualifying use (such as rental or vacation home activity) during that period, as well as for prior depreciation deductions that are partly responsible for the gain.
2. Some credits that formerly could offset only regular tax liability now can be used to reduce the Alternative Minimum Tax (“AMT”) as well. Included are the Low-Income Housing Credit and the Rehabilitation Credit. Additionally, certain tax-exempt interest income from private activity bonds will no longer represent taxable income for AMT purposes.
3. Earlier this year, the Economic Stimulus Act of 2008 reinstated “bonus depreciation,” whereby 50% of qualifying fixed asset additions may be deducted in full in the year property is placed into service. It generally applies to assets with a short depreciable life acquired during 2008 for use in a trade or business. The Housing Assistance Tax Act of 2008 offers corporate taxpayers the ability to choose between utilizing that bonus depreciation and increasing current utilization of research credits and AMT credits. The rules and calculations related to this provision are very complex. In general, the previously-enacted bonus depreciation should be viewed as a means of accelerating (not increasing) an existing deduction. The new rules provide another alternative that involves accelerating the use of an existing credit in lieu of accelerating depreciation deductions. These provisions may be of particular interest to corporations facing research credits that soon will expire.

The Act contains several provisions that will appeal to homeowners, and planning opportunities may exist for individuals who are planning the purchase or sale of a new home or the purchase of assets for use in their trade or business.

This article is provided for information purposes only and should not be relied upon for legal or financial advice. For more details about this matter, please contact a BNN tax professional at 800.244.7444