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Building Blocks to Help Homeowners
And the Real Estate Industry

The new Housing Assistance Tax Act of 2008, enacted as part of a larger housing bill, contains a wide range of tax breaks for many individuals. Significantly, it may benefit new homebuyers, existing homeowners and some senior citizens. On the downside, the new tax law contains some unfavorable changes,

Non-Tax Provisions in the New Law

    The income tax breaks in the new Housing and Economic Recovery Act of 2008 have grabbed most of the attention. But various other non-tax provisions also benefit certain homeowners.

Here are some of the key changes you should be aware of:
    Loan Replacements - Under the new law, you may be able to replace a mortgage on a principal residence originating before 2008 with a new fixed-rate loan lasting at least 30 years. But the new loan amount can't exceed 90 percent of the current value of the home. To qualify for this benefit, your monthly housing payment on March 1, 2008 (counting principal, interest, taxes and insurance on all mortgages) must exceed 30 percent of your monthly household income.
    Note: The renegotiation is not mandated for mortgage lenders. This program officially takes effect on October 1, 2008, but some lenders may jump the gun. It is scheduled to end on September 30, 2011.
    Loan Limits - The new law increases the limits on loans available from the two main government-sponsored mortgage financers: the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Mortgage Corporation ("Freddie Mac").
    Before the new law, the maximum loan allowed was $417,000. After 2008, Fannie Mae and Freddie Mac will be able to buy loans up to 115 percent of the local median price, up to a maximum of $625,000. (Under transitional rules, larger amounts may be approved this year.) Any loan above this amount will be treated as a jumbo loan subject to higher interest rates.
    Reverse Mortgages - A reverse mortgage enables a homeowner to tap into built-up home equity. In return, the homeowner may receive a lump-sum payment or monthly installments. In order to qualify, you must be at least 62 years old.
    However, there's a catch: You generally have to pay relatively high fees for this privilege. Also, the lender may attach additional conditions. To counteract these practices, the new law imposes two key rules:
    1. Origination fees on reverse mortgages are limited to 2 percent on any loan up to $200,000 and 1 percent for any loan above that, up to a maximum of $6,000.
    2. You can't be forced to purchase any financial product as a condition for obtaining a reverse mortgage.
    REITs: A Real Estate Investment Trust (REIT) is a corporation that invests in real estate properties, much like the way a mutual fund invests in stocks. As with a mutual fund, the corporation's portfolio is handled by a professional management team.
    To qualify as a REIT, the entity must meet complex organizational and recordkeeping requirements. The new law includes numerous reforms designed to clarify and simplify the rules for REITs.
    Credit Card Reporting - On the other hand, not all the changes in the new law are favorable. For example, one provision requires banks of merchants accepting credit cards, debit cards or other third-party payments to report their annual gross receipts to the IRS. In other words, the IRS will have greater access to your personal information. This creates a new paper trail that is likely to be used as a springboard for more IRS audits.
    The tax agency will now be able to compare a merchant's card sales to cash transactions reported and expenses claimed. There are many details yet to be worked out. The change takes effect on January 1, 2011.

Examine how the new housing law could affect your business. For example, homebuilders are the most likely to benefit. But the bill is also expected to be advantageous to certain apartment developers (due to the low-income housing credit provision). And retailers generally benefit when people buy real estate since they purchase furniture, home improvement products, etc. However, the new law could hurt retailers due to the new credit card reporting provision. Industry leaders say it will lead to unfair IRS audits of some merchants and increase the cost of accepting credit cards.

including a potential tax trap for individuals who convert a second home into a principal residence.

The following is an overview of several provisions affecting individual taxpayers:

Homebuyer's Tax Credit - For taxpayers who qualify, you can claim a first-time homebuyer's credit equal to the lesser $7,500 or 10 percent of the purchase price of the home -- but as you'll see below, there's an unusual catch and some limitations.
For purposes of this credit, newlyweds, recent college graduates and other young homebuyers will obviously benefit the most. However, other taxpayers can also take advantage since the definition of "first-time homebuyer" includes anyone who has not owned a principal residence in the last three years. The credit is available for purchases made between April 9, 2008 and October 1, 2009.

However, this new credit phases out if your AGI exceeds $75,000 ($150,000 if you file a joint return). The phase-out is complete once your AGI hits $95,000 ($170,000 for joint filers).

The Catch: In addition, you must generally repay the credit in equal amounts on your federal income tax returns over 15 years, beginning two years after the purchase. In essence, taking the credit is like receiving an interest-free loan from the government.

Special Circumstances: The credit does not have to be repaid if the taxpayer dies. There are other rules for special circumstances such as a residence being transferred in a divorce.

What if you sell a principal residence before repaying the credit? The unpaid amount becomes due that year (this is called accelerated recapture). Fortunately, the amount of a recaptured credit cannot be more than the gain you receive from the sale.

For more information in your situation, contact your tax adviser.

For Non-Itemizers - Under the new law, homeowners who don't itemize on their tax returns can write off $500 ($1,000 for joint filers) in addition to the standard deduction. This new tax break, which is expected to benefit many senior citizens, is available only for the 2008 tax year.

To qualify for the one-time deduction, you must report the property taxes you paid for the year on your 2008 return. If the amount is less than $500 ($1,000 for joint filers), the deduction is limited to the property taxes actually paid.

Low-Income Housing Credits -Investors in qualified low-income housing projects may be eligible for a special tax credit under a complex set of rules. The credit is claimed over a ten-year period based on the applicable credit percentage for the type of project.

The new law effectively increases the credits available under this special program. It also simplifies some of the complexities, including the determination of area gross median income for these purposes. Finally, the new law modifies various other low-income housing credit rules. Your tax adviser can provide more details.

Tax-Exempt Housing Bonds - These bonds are often used by state and local governments to fund various housing projects. The interest earned by investors buying these bonds is exempt from federal income tax.

As with the low-income housing credit, the new law simplifies the rules for tax-exempt bonds and clarifies others. Note: Interest from these bonds is subject to state income tax if you live outside the issuing state.

Home Sale Exclusion - We've saved the worst for last. If you owned and used a home as your principal residence for at least two of the last five years, you can exclude the first $250,000 of gain from tax ($500,000 for joint filers). However, under a new law change, if you convert a second home (like a vacation home) into your principal residence, part of the gain won't qualify for this home sale exclusion.

The tax will be based on the amount of days the home was used for a nonqualified purpose divided by the total number of days you owned it. This ratio is multiplied by the amount of gain realized on the sale of the home.

Consolation: This provision only applies to home sale gains after 2008. Furthermore, only nonqualified use after 2009 counts against you. Develop a strategy for the future based on this change.