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Housing and Economic Recovery Act of 2008

Congress continues to attept to stop the housing decline. This particular bill (signed by President Bush on July 30, 2008) contains a number of provisions. The major tax-related items are listed here.

First-time Homebuyers Credit [sic]
First it is important to realize that this is not really a credit. While the provisions allows a credit on your tax return when you purchase a home, you must pay the full "credit" back. So clearly this is better desribed as a loan. Still, it is interest-free and, even though rather small, it is better than nothing. Unfortunately many in Congress will claim a major victory for the home-owner over this. (If they were not planning on distorting the facts like this it would not called a credit.)
Property tax deduction for non-itemizers
This is a nice little gift for those who have paid off their houses. In most cases that is the taxpayer who does not itemize deductions. (Those who do not own a home often do not itemize either, but this provisions does not help them any.) For 2008 only, those paying property tax can deduct this from their income even without itemizing other deductions. But, the limit is either $500 or $1000. This seems like a good candidate for being extended each year....

Low-income housing credit
There is a tax credit available to taxpayers who invest in low-income housing. This is provided to encourage investors to invest in these housing projects, thus providing more low-cost housing for those with lower incomes. This law increases the credit and simplifies the overly complicated process for determining this credit.

Tax-exempt housing bonds
Within our tax system there are a number of items that produce tax-exempt income. The concept is to make those investment more attractive, allowing such programs to sell bonds to raise money without having to pay as high of interest on those bonds. It is a means of aiding programs of public interest. This law simplifies the process of qualifying housing bonds (generally used for low-income housing) to encourage more development in that area.

Mortgage revenue bonds
This temporary provision expands this program to assist states in providing aid to first-time homeowners who need to refinance sub-prime mortgages.

REIT Reforms
Makes some minor changes in the Real Estate Investment Trust rules to encourage investments in REITs protecting the mortgage structures supported by these investment vehicles.

AMT and R&D credits
This provision allows corporations to use accumulated AMT credits and also research and development credits to offset taxes. In exchange, the corporation gives up the opportunity to take certain temporary accelerated depreciation.

Tax-exempt bonds
Previously the federal government could not guarantee tax-exempt bonds issued by state and local governments except for Fannie Mae and Freddie Mac (two federally chartered mortgage companies) plus a few other isolated entities. This restriction is now relaxed a bit to hopefully make financing easier to come by.

AMT limitations
Many of the tax-exempt bonds and investment vehicles are subject to the Alternate Minimum Tax (AMT). This bill exempts certain housing bonds (already tax-exempt) from AMT. It also allows certain tax credits associated with the low-income housing program to be used to offset AMT taxes.

Rehabilitation tax credit
There are credits available for the rehabilitation of historic buildings. Previously this was not available if over 35% of the building was leased to local or state government. That threshold is now increased to 50%, allowing additional buildings to qualify.

Down payment assistant programs
The law now prohibits seller-funded down payment assistant programs (DAPs) DAPs have been criticized for contributing to the recent foreclosure rates. In 2006 the IRS announced that organizations providing this help does not qualify as tax-exempt charities.

Military personnel
The new law temporarily expands the provisions offered to military personnel, including mortgage interest rate relief during times of active service.

Credit card sales information reporting
As an offset to the tax reductions, the new law will require credit card processing companies to report total credit card sales transactions to both the business accepting credit cards for payment and to the IRS. If the business does not provide its tax identification number (TIN) to the processor, then backup withholding of 28% will be done. At this point we see litle issue with this. The cost of reporting should not be that extreme, and the only other impact will be on business that do not report their full sales (i.e., tax evasion).

Reduced home sale exclusion
As an offset to the tax redictions, this law established a separation between what is now called "qualifying use" of a house which is the period used as a primary residence, and "non-qualified use" of a house which is all other uses. Only capital gains associated with qualified use can be excluded from taxation through section 121 home sale exclusion. (This is the $250,000 individual or $500,000 joint exclusion we take when we sell our homes.) The gain is pro-rated over the whole ownership period, not assigned to periods as the market fluxuates. There is "grandfather" protection for periods of use before 2009.

This is not an exhaustive list, but it does outline the major items.

"Tax software is no substitute for tax knowledge."
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Janelle Ogg, EA
Richard Ogg, EA