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by Douglas Schultz and Kristie Carvalho

On July 30, 2008, President George W. Bush signed the Housing Assistance Tax Act of 2008 into law. The Housing Act was signed into law as a reaction to the continuing slump in the real-estate market, rise in unemployment and the tightening up of the credit market. This article focuses on the new tax provisions that came out of the Housing Act and how they may affect you, your family and your business.

“Tax Credit” for First-Time Homebuyers
The new law provides first-time homebuyers with a potential refundable tax credit of $7,500. The credit is cut in half for married couples who file separate returns, and the credit cannot exceed 10% of the new home’s purchase price.
The first-time homebuyer credit, like most other tax credits, reduces an individual’s tax liability on a dollar-for-dollar basis. As the first-time homebuyer credit is a “refundable tax credit,” if the credit is more than the tax you owe, the difference is paid to you as a tax refund. It is refundable even if you are subject to the Alternative Minimum Tax.

However, this credit comes with a twist. Unlike other federal tax credits, such as the child tax credit, the new first-time homebuyer credit must be paid back to the government in equal installments over a period of 15 years. Payments back to the government start two years after the residence is purchased. Essentially, the new first-time homebuyer tax credit is an interest-free loan from the government.

Individuals can take advantage of the tax credit for first-time homebuyers if they meet certain criteria. First, the filer must be a first-time homebuyer. “First-time homebuyer” is defined as an individual (and if married, their spouse) who had no ownership interest in a principal residence during the three-year period before the qualifying principal residence is purchased. Second, the qualifying principal residence is purchased on or after April 9, 2008, and before July 1, 2009. Third, the maximum credit is allowed to individuals if their modified Adjusted Gross Income does not exceed $150,000, if filing a joint return, and $75,000 for all other filers. The credit will begin to phase out when a taxpayer’s income is in the $150,000 to $170,000 AGI range for joint filers, and $75,000 to $95,000 AGI range for all other filers.

Unmarried individuals who jointly purchase a principal residence may qualify for the first-time homebuyer credit. The credit will be allocated among the individuals based on rules to be laid out by the IRS. Under no circumstance will the credit resulting from a single-home purchase exceed $7,500.

If you are the owner of a vacation home, but rent your principal residence, you may qualify for the credit if you purchase a principal residence within the specified time frame. The three-year look-back period mentioned above applies only to a principal residence that you own, so if you live in a rental and buy a principal residence, you may benefit from this new tax provision.

The $7,500 first-time homebuyer credit is claimed on the individual’s tax return for the year in which the principal residence is purchased. If the home is purchased after December 31, 2008, and before July 1, 2009, taxpayers have the option of claiming the credit on their 2008 tax return instead of their 2009 tax return.
The credit will be paid back over a 15-year period as an “additional tax” on an individual’s federal tax return. The payments will begin being made on the tax return filed for the second year after the year in which the new home is purchased. First-time homebuyers who buy principal residences in 2008, and claim a $7,500 credit, will pay the credit back starting with the 2010 tax return they file in 2011, and ending with the 2024 tax return they file in 2025, at the rate of $500 per year.

The payback of the credit is accelerated if an individual sells the principal residence or stops using the home as the principal residence before the end of the repayment period. The entire unpaid balance of the credit is due in the year in which the home is sold or not used as a taxpayer’s principal residence.

If a taxpayer passes away, the credit does not have to be repaid. Special rules also exist for an involuntary conversion and for a residence transferred as a result of a divorce. If you are a taxpayer who may qualify for the above first-time homebuyer credit, you may want to consider adjusting your current federal withholding or estimated tax payments as a result of the credit.

Property Tax Deduction for Nonitemizers
Before the 2008 Housing Act was signed into law, only individuals who itemized deductions on their tax returns were eligible to claim a deduction for property taxes. The new law will essentially allow a limited deduction for paid property taxes to taxpayers who do not itemize.

The property tax deduction for non-itemizers will be claimed by granting taxpayers an increased standard deduction by the lesser of: the amount of property taxes paid during the year, or $1,000 for joint filers and $500 for all other filers.
For 2008, the standard deduction for taxpayers qualifying for the increase will be $11,900 for married taxpayers filing a joint return and $5,950 for all other filers. The increased standard deduction is available only for the 2008 tax year.

Reduced Home Sale Exclusion
For certain taxpayers, sales of their principal residences after December 31, 2008, may become costly as a result of the 2008 Housing Act. After 2008, some home sellers who do not use their properties as principal residences for their entire ownership period may wind up paying more of a tax bill than they would under current rules, or even pay tax when none would be owed under the current rules.

The current tax break we all know well is the Internal Revenue Code §121 home-sale exclusion, which generally allows up to $250,000 of gain from the sale of a principal residence to be tax-free if a home was owned and used by the seller as a principal residence for at least two out of the past five years before the home was sold. In general, the §121 exclusion is only allowed to be used once every two years. The §121 gain exclusion can be up to $500,000 for married taxpayers filing jointly for the year of sale, if several conditions are met. A reduced §121 exclusion can apply to taxpayers who must sell their principal residence because of health or employment changes, certain unforeseen circumstances, as a result of failing the two-out-of-five-year ownership and use rule, or using the §121 exclusion within the past two years.

For home sales after December 31, 2008, gain from the sale of a taxpayer’s principal residence will no longer be excluded from income for periods in which a taxpayer did not use the property as a “principal residence.” A period in which a taxpayer does not use the property as a principal residence is called the “non-qualifying use” period.

Under the new law, taxpayers will not be allowed to exclude any gain attributable to their nonqualified use period. The amount of gain allocated to the period of “nonqualifying use” is the gain multiplied by the nonqualified use period over the entire period the taxpayer owed the property. The new provision resulting from the 2008 Housing Act only takes into account nonqualifying use that starts on or after January 1, 2009.

A prime example of a home that may get caught by the new provision of the 2008 Housing Act is a vacation home that is turned into a principal residence by its owners. However, the new rule can also affect individuals who use a property as a main home for a while, rent it out for a period of time, and then move back in.
Here is an example of how the new law works. Suzy, a single taxpayer, buys a property on January 15, 2009, for $600,000. She rents it out for two years and claims $40,000 of depreciation during the two-year rental period. On January 15, 2011, Suzy moves into the property and begins using it as her principal residence. She moves out of the home on January 15, 2013, and sells it for $900,000 on January 15, 2014.

The years 2009 to 2011 are treated as Suzy’s “nonqualifying use” period. The years 2011 to 2013 are treated as “qualifying use” periods, as well as the year 2014. The year 2014 is treated as a “qualifying use” period because periods of absence generally count as qualifying use if they occur after the home was used as a principal residence.

The gain on the sale of Suzy’s home is $300,000. Forty percent (two years of nonqualified use out of five total years of ownership) of the gain is attributable to her “nonqualified use” period; therefore, $120,000 of the gain is not eligible for the $250,000 exclusion under §121. The remaining $180,000 gain may be excluded under §121; however, the $40,000 of depreciation taken on the rental must be recaptured under the current law.

The Low-Income Housing Credit
State and local tax agencies give tax credits for the acquisition, rehabilitation and construction of low-income rental housing projects. The 2008 Housing Act simplifies many provisions related to the credit. For buildings placed in service after December 31, 2007, the low-income housing credit can offset an individual’s AMT liability, and interest income from tax-exempt housing bonds is no longer subject to AMT.

The above tax provisions are only a sampling of the many changes that resulted from the Housing Assistance Tax Act of 2008. The changes summarized above were tailored to the readers of this magazine. The 2008 Housing Act contained many other tax provisions that are applicable to various business entities. If you would like a further understanding of the Housing Act and how it may affect you or your business, please contact the authors or review a summary of the housing act online at: waysandmeans.house.gov/media/pdf/110/eresummary.pdf

 

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The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Douglas Schultz is a CPA and partner in the tax practice in the San Francisco office of Burr, Pilger & Mayer, LLP. Kristie Carvalho is a CPA and tax manager in the Walnut Creek office of Burr, Pilger & Mayer, LLP. Both can be contacted at 415-421-5757. Copyright © 2008 by Black Point Press. All rights reserved.