The Foreclosure Prevention Act of 2008, recently signed without fanfare by President Bush, contains provisions that will, according to insiders, complicate tax returns for years ahead.The tax portion of the bill, the Housing Assistance Tax Act of 2008, contains over $15 billion in tax incentives that are offset by a number of revenue raisers.
The act gives first-time homebuyers what amounts to an interest-free loan in the form of a tax credit of 10 percent of the purchase price of a principal residence, up to $7,500. The credit must be repaid in equal installments over 15 years, beginning with the second year after the year of purchase. The credit is effective for homes purchased on or after April 9, 2008, and before July 1, 2009, and phases out for taxpayers with adjusted gross income over $75,000 ($150,000 for joint returns).
Taxpayers can qualify as first-time homebuyers even if they owned a home in the past, so long as they have had no ownership interest in a principal residence within three years of the new purchase. The measure allows property owners who don’t itemize to claim a standard property deduction, only for 2008, of the lesser of the amount of real property taxes paid during the year or $500 ($1,000 for joint filers).
The offsets include expanded information reporting, under which processors of credit and debit card transactions must report a merchant’s gross payment card receipts beginning in 2011.
The act offers non-itemizers the ability to claim a standard property deduction of up to $500 for individuals and $1,000 for joint filers, available only for 2008.
Businesses are provided an election to cash out some of their older AMT and research credit carryovers in lieu of claiming bonus depreciation on property placed in service during the last nine months of 2008.
Among the offsets is a limitation on the amount of gain from the sale of a principal residence. Gain excluded from income will now be pro-rated to eliminate the portion of time after 2008 that it is not used as a principal residence.
BUT WILL IT WORK?
“The first-time homebuyer credit is certainly a nice advantage, but it’s not clear how stimulative that is really going to be,” said Mel Schwarz, legislative affairs director at Grant Thornton’s National Tax Office. “I’m curious to see how people will handle the repayment requirement. That’s not the part they seem to be advertising. They call it a credit but it’s a loan. And it’s a loan that you have to pay back.”
Schwarz said that there will probably be objections to the payment card reporting. “It’s not applicable until 2011, so there’s plenty of time for people to figure out how to do it and have shots at knocking it out.”
“This provision will be interesting for accountants because they have made everything so much more complicated,” opined John Olivieri, a partner in the New York office of law firm White & Case LLP.
When a taxpayer converts a vacation or rental home to a residence, the amount of gain is pro-rated according to the amount of nonqualified-use time for years after 2008.
However, the flip side is different, Olivieri explained: “If it starts out as a vacation or rental home, then the period it is a vacation or rental home is a period of nonqualified use,” he said. “But if it starts out as your residence, you get to treat it as your residence.”
“Suppose a married couple buys a home on Jan. 1, 2009, for $600,000. They plan to hold it as an investment,” he said. “On Jan. 1, 2012, three years later, they begin using it as their principal residence. They live there two years and sell it on Jan. 1, 2014, for $1.1 million, realizing a profit of $500,000. Under the old law, they would have been able to exclude the entire $500,000 gain from their taxable income. But under the new law, they can exclude only two fifths of the gain, or $200,000, since the other three fifths will be considered attributable to the three years that the home wasn’t their principal residence.”
“On the other hand,” he continued, “suppose that same couple buys a home on Jan. 1, 2009, for $600,000 and immediately begins using it as their principal residence. On Jan. 1, 2012, they move out, and on Jan. 1, 2014, five years after the purchase and two years after they move out, they sell it for $1.1 million, realizing a profit of $500,000.”
Olivieri said that under both the old law and the new law, the entire $500,000 would be excluded from income, because under the new law, any period of non-use as a principal residence during the five years prior to sale will not be counted if it occurs after use as a residence. That’s unlike the first example, where the non-use as a principal residence occurred before use as a residence.
“Furthermore, the new law gives owners a break by not counting any period of non-use as principal residence occurring prior to Jan. 1, 2009,” Olivieri said.
The change in rules is exceedingly complex, agreed Bob Trinz, senior tax analyst at the Tax & Accounting business of Thomson Reuters.
“The primary target in the committee reports is the double-dipper, someone who sells their home in the suburbs, gets the exclusion and moves into their vacation home for long enough to qualify for two out of five years. The new limitation will curb — but not curtail — the practice.”
One tax impact of the legislation is not directly in the tax provisions, according to George Jones, managing editor of the CCH Washington Office.
“The arrangements for mortgage lenders to forgive part of the debt in return for favorable banking law treatment have some tax implications for consumers,” he said. “They need to realize that although it’s generally covered under the act as exempt forgiveness indebtedness income, it will lower their basis in an eventual sale. And if part of the mortgage debt was the result of a cash-out refinancing, that’s going to be taxable income immediately.”
Jones noted that the home sale exclusion of $250,000 and $500,000 began in 1997. “When you factor in the inflation since then, they’re not worth that much,” he explained. “In real dollars, they should be at $340,000 and $680,000.”
MORE HARM THAN GOOD?
Although President Bush signed the bill, more than three quarters of Republicans voted against it in the House.
Sen. Chuck Grassley, R-Iowa, ranking member of the Senate Finance Committee, explained his and the GOP’s opposition: “The problem with this massive bill is that it could do more harm than good. It started out to help Americans who are losing their homes, but it ended up giving banks a $4 billion incentive to foreclose.”
“Even the tax package ... has been discredited by changes made by the House of Representatives that unraveled bipartisan tax reforms and did things like give favor to tenants who are artists or literary figures over low-income families,” he continued.
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