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Housing and
Economic Recovery Act of 2008
The Housing
and Economic Recovery Act of 2008 is designed primarily to help troubled
borrowers and their lenders, including Fannie Mae and Freddie Mac. But it
also provides incentives and tax breaks for certain homebuyers,
homeowners, businesses and real estate investors, as well as for GO Zone
residents and investors.
Breaks for homebuyers and owners
The Housing
act contains two significant home-related tax breaks. Even if they won't help you, they
may help your children or parents:
1. Credit for first-time homebuyers. A refundable credit equal to 10% of
the purchase price of a principal residence is now available to
first-time homebuyers. Under
the act, a first-time homebuyer is someone who has had no ownership
interest in a principal residence in the United States during the
prior three-year period. There
are certain other limitations as well.
This tax break
is generally available for purchases on or after April 9, 2008, and
before July 1, 2009. The
maximum credit is $7,500 and starts to phase out for joint filers with adjusted
gross incomes (AGIs) exceeding $150,000 ($75,000 for single filers). It's completely eliminated for
joint filers with AGIs exceeding $170,000 ($95,000 for single filers). Note, however, that the taxpayer
must repay the credit received, generally over a 15-year period but with
no interest. So the break is
really more of an interest-free loan from the government than a genuine
tax credit.
2. Additional standard deduction for
property taxes. For 2008, the standard deduction
for married couples filing jointly is $10,900 ($5,450 for singles). The
Housing act provides an additional standard deduction equal to the lesser
of 100% of state and local property tax paid or $1,000 for joint filers
($500 for single filers).
This tax break
will benefit many older homeowners who are close to paying off (or have
already paid off) their mortgages. Because such taxpayers have little
or no mortgage interest expense, they often don't have enough deductible
expenses to exceed the standard deduction and warrant itemizing. As a
result, before the act, they received no federal tax break for their
property tax costs. For
taxable years beginning in 2008, however, they can offset some or all of
these costs with the additional standard deduction.
Breaks for businesses and real estate
investors
Corporate
taxpayers can take advantage of a provision that allows them to
accelerate their alternative minimum tax (AMT) and research &
development (R&D) credits in lieu of taking the bonus depreciation
available under the Economic Stimulus Act of 2008. The bonus depreciation amount is
equal to 50% of an eligible asset's basis, generally if the property is
acquired this year. Eligible property includes:
- Tangible property with
a recovery period of 20 years or less,
- Computer software
purchased by the business,
- Water utility property,
and
- Qualified leasehold
improvement property.
Under the
Housing act, corporations that elect to accelerate AMT or R&D credits
will enjoy a credit limit increase equal to 20% of the bonus depreciation
for which they are otherwise eligible. (Credits can be more valuable than
depreciation deductions because they reduce your tax bill
dollar-for-dollar, rather than just reducing the amount of income that is
taxed.)
The allowable
credit is capped at the lesser of $30 million or 6% of an amount that is
determined using a somewhat convoluted formula based on certain prior
R&D credit carry-forward amounts and certain minimum tax credits. The provision is generally
effective for property placed in service after March 31, 2008, (so long
as no written purchase contract existed at that time) and before Jan. 1,
2009. In some circumstances,
though, the deadline is extended and the credit will be available for
assets placed in service as late as Dec. 31, 2009.
The act also
contains provisions that may affect real estate investors and developers.
For example, it expands the
availability of certain low-income housing tax credits, simplifies the
rules for tax-exempt housing bonds and provides some extensive reforms
related to Real Estate Investment Trusts (REITs).
Breaks for GO Zone residents and
investors
The Housing
act allows victims of Hurricanes Katrina, Wilma or Rita to adjust
casualty loss deductions claimed for their principal residences to
reflect subsequently received grant payments to cover uninsured losses
caused by the hurricanes. Taxpayers
who receive a payment for losses previously claimed would usually have to
recognize the income, and be liable for the additional income tax, in the
year the payment is received. The act allows for the taxpayer
instead to file an amended return for the year the loss was incurred,
with the reimbursement reducing – but not below zero – the
loss.
While
typically filing an amended return would lead to an assessment of
interest and, potentially, penalties, the act provides for a waiver of
all penalties and limits the interest calculation to just one year of
interest. To be eligible for
the waiver, the taxpayer must pay the tax and interest within one year of
filing the amended return.
In addition,
Gulf Opportunity (GO) Zone property can
now be placed in service in years after 2007 or 2008 and continue to
qualify for special GO Zone first-year bonus depreciation (equal to 50% of
the basis of qualified GO Zone property).
The Housing
act generally extends these deadlines to Dec. 31, 2010. Even if you don't reside in the GO
Zone, if you own property there you may benefit from the extension of tax
breaks related to those investments.
Revenue-raising provisions
The Housing
act also includes a few revenue-raising provisions. For example, under the act, the
home sale gain exclusion won't apply to the extent that it relates to the
nonqualified use period of a residence. Normally joint filers can exclude
up to $500,000 ($250,000 for single filers) of gain on the sale of a
principal residence if they meet certain tests, including a use test. Generally, the nonqualified use
period is any period after Jan. 1, 2009, that the property is not used as
the taxpayer's principal residence.
The change
will affect taxpayers such as those who own a vacation home or rental
property, convert it to use as a principal residence for the required
time, and then sell it at a gain. Part of the gain in these situations
will now be taxable.
Find out exactly how you're affected
Determining
exactly how the Housing and Economic Recovery Act of 2008 will affect
your tax liability – and what you should do to take full advantage
of the act – can be tricky. So please let us know if you have
any questions about this or other tax laws, as well as strategies you
might implement to minimize your taxes for 2008 and beyond.
If you have
any questions or concerns, please contact our office at
(314)
726-0626.
Sincerely,
Maher & Company PC
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