The Senate has passed a housing rescue plan by a vote of 72-13 aimed at stemming the tide of foreclosures and shoring up Fannie Mae and Freddie Mac.

Senate passage of the bill comes only a few days after the House passed similar legislation (see House Approves Mortgage Rescue Plan). The bill contains various tax provisions that have received a mixed reaction. "Some homebuyers and current homeowners stand to benefit from the bill, but others will help pay for it with higher taxes down the line," predicted CCH principal tax analyst Mark Luscombe.

Some homebuyers will benefit from the provision of a refundable first-time homebuyer credit, intended to stimulate demand, he noted. The credit is available to those who purchase a home on or after April 9, 2008, and before July 1, 2009, and who haven't had "ownership interests" in a principal residence during the three prior years. The credit is 10 percent of the purchase price or $7,500, whichever is less -- but for married people filing separately, the $7,500 limit becomes $3,500. Unmarried people who jointly purchase a home can divide the $7,500 credit, but how the division is to take place is left to IRS regulation-writers.

The credit begins to phase out at the $150,000 income level for joint filers ($75,000 for other filers) and is not available for joint filers with income above $170,000 ($95,000 for other filers). It's also not available to nonresident aliens, those who qualify for a similar District of Columbia credit or those whose financing comes from tax-exempt mortgage revenue bonds.

"This provision contains some catches," said Thomson Reuters senior tax analyst Bob D. Scharin. "The credit is more of an interest-free loan than a complete giveaway; in general, taxpayers will have to pay back the credit they claim over 15 years. Also, income limitations restrict eligibility."

Another provision permits homeowners who don't itemize to take up to $500 ($1,000 for joint filers) of their state and local property taxes as an additional standard deduction on their 2008 return.

People may be adversely affected by the bill, including those who buy a vacation home, or who rent out a home while planning to make it their main residence at a later time. Currently, if a second home becomes a principal residence, after two years the owner can sell it and exclude up to $250,000 in gain from their income -- or up to $500,000 for couples filing jointly.

But the bill pro-rates the exclusion between the time that a home is used as a principal residence and the total length of ownership, which includes any "non-qualifying" use as a rental or vacation property. Non-qualifying use before the Jan. 1, 2009, effective date of the provision isn't used in the calculation, however. Nor are periods after a qualified use of the property or temporary absences of less than two years.

"Quick action can provide an escape hatch," said Scharin. "The crackdown takes effect in 2009, and taxpayers who turn their vacation home into their principal residence before the end of 2008 can avoid the impact of the new rule."

Sen. Chuck Grassley, R-Iowa, ranking member of the Senate Finance Committee, criticized some of the tax provisions in the bill. "Even the tax package, which I was involved with during Senate consideration of the measure, 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 said. "I voted to proceed to this legislation because I very much wanted Congress to address the important housing issues facing the country today, but this bill has fallen prey to the special interests on Wall Street and K Street at an unjustifiable expense to taxpayers and homeowners on Main Street."

To raise revenue to pay for the bill, one provision would require institutions that make payments to merchants for settling payment card transactions to file an information return with the IRS. The bill would also delay the implementation of a tax benefit for the worldwide allocation of interest for multinational companies.

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