Housing Assistance Tax Act of 2008 Adds $15.1 Billion in Tax Incentives; Broad-Based Offsets
In an unusual Saturday session on July 26, Congress passed a sweeping housing assistance package, the Housing and Economic Recovery Bill of 2008, which includes a tax title - the Housing Assistance Tax Act of 2008 - providing $15.1 billion in tax incentives principally targeted to home ownership and affordable housing. Soon thereafter, on July 30, President Bush signed the housing bill. Although the tax provisions represent only a portion of the larger housing bill, they make significant changes. They also not only affect the housing industry. Those retail businesses, vacation/rental property owners and others directly affected by the tax increases needed to pay for all of the new housing tax incentives are especially hard hit.
First-time homebuyer credit
The housing bill gives first-time homebuyers a new - and temporary - tax credit equal to 10 percent of the purchase price of the home up to $7,500 ($3,750 for married individuals filing separately). The credit is only available for home purchases made on or after April 9, 2008 and before July 1, 2009. The first-time homebuyer credit must be repaid in equal installments over the course of 15 years, which makes the credit more like an interest-free loan from the government for most qualifying homeowners.
The credit phases-out for married couples with modified adjusted gross income (AGI) between $150,000 and $170,000, and for single taxpayers with modified AGI between $75,000 and $95,000.
Also, to be eligible to claim the credit, an individual (or his or her spouse, significant other or otherwise a co-owner) must not have had any type of ownership interest in a principal residence during the three-year period before the date that the principal residence, for which the credit is to be taken, is purchased.
Standard real property deduction for non-itemizers
Currently, only individuals who itemize deductions may deduct real property taxes imposed by state and local governments. The new housing bill gives taxpayers who claim the standard deduction (non-itemizers) a limited deduction for state and local real property taxes. The maximum deduction that can be taken is $500 ($1,000 for joint filers) or the amount of real property taxes paid during the year, which ever is less. Since the new deduction is part of the standard deduction, it is not an above-the-line deduction that lowers a taxpayer's adjusted gross income.
The deduction is temporary and available only for the 2008 tax year. Therefore, for 2008, the $10,900 standard deduction for joint filers and surviving spouses will increase to a maximum of $11,400 as a result of the credit, while the $5,450 standard deduction for single individuals increases to a maximum of $5,950, and the head of household amount from $8,000 to $8,500.
The new housing bill also significantly expands certain tax programs aimed at providing affordable housing for low- and moderate-income individuals.
Low-income housing credit
The Housing Assistance Tax Act not only recognizes problems with the single-family sector of the housing market, it also helps multi-unit housing residents by encouraging investment in them. As its keynote provision, it simplifies and temporarily increases the low-income housing tax credit (LIHTC). The LIHTC program gives greater leeway to state and local housing agencies to issue tax credits for the acquisition, rehabilitation or construction of lower-income rental housing. So far, the focus is on limiting these incentives to 2008 and 2009 only.
Tax-exempt housing bonds
Tax-exempt housing bonds (also called qualified private activity bonds) are issued by state and local governments to fund the acquisition, construction and rehabilitation of affordable housing. The interest earned by the holder is exempt from federal tax. The housing bill simplifies the rules for tax exempt housing bonds and, in many cases, aligns the rules to those governing the LIHTC.
Special AMT rules. The new law also allows the LIHTC to be taken against the alternative minimum tax (AMT), permits the LIHTC and the rehabilitation tax credit to be used to offset the AMT and ensures that interest on tax-exempt housing bonds is not subject to the AMT.
Mortgage revenue bonds
Of particular significance for subprime borrowers facing interest rate resets on their loans is the housing bill's provision regarding use of mortgage revenue bonds to refinance into a loan with more favorable terms. Mortgage revenue bonds are sold by state and local government housing finance agencies (HFAs) to finance below-market mortgages for qualifying first-time homebuyers. The housing bill temporarily expands the mortgage revenue bond program to allow the refinancing of existing subprime mortgage loans before interest reset terms put such borrowers over their heads with monthly payments.
REIT reforms
The new law includes a package of real estate investment trust (REIT) reforms. A REIT, which is created under state law, holds passive investments in real property equity and mortgages. The new law liberalizes certain rules that limit the ability of businesses operating as REITs to adjust to changing market conditions and manage their risk.
Additional tax incentives
AMT and R&D credits. In an important tax break for many businesses, the housing bill allows companies in a loss position to use accumulated AMT and research and development (R&D) credits early, and to make new investments in lieu of the special bonus depreciation provided in the Economic Stimulus Act of 2008. The accumulated credits are increased by 20 percent of the excess bonus depreciation (over straight-line depreciation) that could otherwise be claimed.
Tax-exempt bonds. The new law permits Federal Home Loan Banks to federally guarantee tax-exempt bonds issued by state and local governments. Essentially, this change should lower borrowing costs and make more financing available for state and local government infrastructure projects.
Military personnel. The new law also temporarily enhances certain protections against foreclosure under the Servicemembers Civil Relief Act. At the request of a service member, mortgage lenders must reduce the interest rate to no more than 6 percent per year during the period of active military service and recalculate the payments to reflect the lower rate.
GO Zone incentives. The new law enhances and extends some of the incentives included in the package of tax incentives passed by Congress after Hurricane Katrina devastated the Gulf Coast.
OFFSETS
All of the housing tax incentives do not come for free. Under Congressional rules, they must be paid for in the same piece of legislation. In the Housing Assistance Tax Act of 2008, that means additional taxes or expenses for a more broad-based group of taxpayers.
Credit card information reporting. Under the new law, banks and other processors of merchant payment card transactions (credit and debit cards) will be required to report a merchant's annual gross payment card receipts to the IRS (and to the merchant). The new law also requires reporting on third-party network transactions (such as ones used by many online retailers). Merchants and payment card processors have time to prepare. The new treatment is effective for sales made on or after January 1, 2011.
The new law creates an exception from information reporting if the aggregate value of third- party network transactions does not exceed $20,000 for the calendar year and the aggregate number of these transactions does not exceed 200.
Reduced home sale exclusion. Gain from the sale of a principal residence will no longer be excluded from gross income under the Code Sec. 121 home sale exclusion for periods that the home was not used as the principal residence ("non-qualifying use"). This new income inclusion rule applies to home sales after December 31, 2008 and, under a generous transition rule, is based only on nonqualified use periods that begin on or after January 1, 2009.
The rule prevents use of Code Sec. 121's exclusion of gain from the sale of a principal residence of up to $250,000 ($500,000 for joint filers) for appreciation attributable to periods after 2008 during which a residence was used as a vacation home or as rental property before its use as the principal residence.
Worldwide interest allocation. Under the American Jobs Creation Act of 2004, an affiliated group may make a one-time election to determine foreign-source taxable income of the group by allocating and apportioning interest expense of the domestic members of a worldwide affiliated group on a worldwide group basis, as if all members of the worldwide group were a single corporation. The new law delays the worldwide interest allocation rules in the 2004 Jobs Act until tax years beginning after December 31, 2010.
Corporate estimated tax payments. Like recent tax bills, the new law accelerates certain corporate estimated tax payments for corporations with assets of at least $1 billion. Payments due in July, August and September 2013 are increased by 16.75 percent.
The tax provisions in the Housing Assistance Act of 2008 make significant tax changes. If you have any questions about how this sweeping new law may affect your tax situation, please feel free to call Dan Duncan at 630-285-0215.
