Thursday, July 31, 2008


On Wednesday President Bush signed into law the Housing and Economic Recovery Act of 2008 (HERA), described in the various news articles as “a massive housing bill intended to provide mortgage relief for 400,000 struggling homeowners and stabilize financial markets”.

For purposes of THE WANDERING TAX PRO I am only interested in the provisions of the bill that directly apply to the federal Form 1040. These are included in the Housing Assistance Tax Act of 2008, a part of the bigger bill, and provide $15.1 Billion in tax incentives that are fully offset.

There are two major tax benefits for 1040 filers – a first-time homebuyer credit and a property tax deduction for “non-itemizers”.

(1) A “refundable” credit (if the credit is more than your total tax liability Sam will send you the difference - like with the Earned Income Credit) equal to 10% of the purchase price, up to a maximum of $7,500 ($3,750 if Married Filing Separately), is provided to a “first-time homebuyer” who purchases a new personal residence on or after April 9, 2008, and before July 1, 2009. To qualify as a “first-time homebuyer” the taxpayer(s) must have had no ownership interest in a principal residence during the three (3) year period prior to the date of closing on the purchase of the new home.

The 3-year look-back period involves ownership of a “principal residence” only. A renter who currently owns, or has owned during the 3-year period, a vacation property may qualify for the credit because the property was not his/her principal residence

The credit is phased out for joint filers with a “modified” Adjusted Gross Income (AGI) of between $150,000 and $170,000 and between $75,000 and $85,000 for single taxpayers.

Generally the credit is claimed on the tax return for the year in which the home is purchased. So if John Q Taxpayer closed on a residence in May of 2008 he will have to wait until early 2009 when he files his tax return to get the $7,500. However, if a taxpayer who already has filed a 2008 Form 1040 makes a qualifying purchase in, say, May of 2009 he/she can elect to file an amended 2008 return to claim the credit – and not have to wait until he/she files the 2009 Form 1040.

The amount of the credit allowed must be paid back to the IRS (on the annual Form 1040) in equal installments over a 15-year period beginning in the second year after the year for which the credit is claimed – 2010 for 2008 and 2011 for 2009.

CCH provides the following example –

Eduardo and Trisha, a married couple, are new homebuyers. They have never owned any other real property as a residence. Their combined modified AGI is $66,400 {I assume they do not live in New Jersey – rdf}. Their first-time home purchase qualifies for the full $7,500 credit. They purchase their home in June 2009. They may file an amended 2008 return to claim the credit. Repayments of the $7,500 credit would be at $500/year in 2010 and end in 2020.”

If the residence is sold, or is no longer used as a principal residence, before the credit has been fully repaid the balance is due on the tax return for the year in which the sale occurs or the use changes. In such a case the credit repayment claimed in that year will not be more than the amount of gain from the sale of the property to an “unrelated” person.

The balance of the credit does not have to be repaid if the homeowner dies. Special rules exist for an “involuntary conversion” or the transfer of the residence in a divorce.

If two unmarried individuals purchase a principal residence together they may each claim a credit appropriate to their individual situation, if they qualify, the total of which cannot be more than the $7,500 maximum.
(2) Taxpayers who own real property and pay real estate taxes, but who do not or are unable to itemize, can claim an “increased standard deduction” of the lessor of the amount of the real estate taxes actually paid during the year or $500, $1,000 if married and filing a joint return (if the total amount of real estate taxes you are paying is less than $500 or $1,000 - unless you purchased the property later in the year - you certainly do not live in New Jersey). This deduction, tough, is effective only for the 2008 tax year.
As stated above this is an addition to your standard deduction, much like the addition for being age 65 or older or blind, and not an “above-the-line” adjustment to income – so it will not reduce your AGI.

For 2008, if this applies, the maximum standard deduction (for a person under age 65 and not blind) would be increased to $11,900 for Married Filing Joint, to $5,950 for Single (or Married Filing Separate, I assume), and to $8,500 for Head of Household.

I see this special deduction as benefiting many of my senior citizen clients - whose mortgage has been paid off and who do not itemize because the standard deduction, enhanced by the additional amount for 2 individuals age 65 or older, provides a greater tax benefit.

One of the ways the tax savings from these two items is being “paid for” is by changing somewhat the rules for excluding gain on the sale of a personal residence. This “offset” has been tacked on to various unsuccessful bills in the past – and has finally made in into the Tax Code.

Effective with the sale of a principal residence after December 31, 2008, you can no longer exclude from gross taxable income under Internal Revenue Code Section 121 gain on the sale of such a home for any periods that it was not used as a principal residence. This applies to a previous vacation home or rental property that was converted to a principal residence or a once principal residence that is rented out prior to sale. The new law applies to “unqualified periods” that begin on or after January 1, 2009. This does not affect any sales that have already taken place or will take place in calendar year 2008.

Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG discusses this change, and provides an example, in his post “FANNIE MAE Bailout Bill Restricts Home Sale Exclusion For Former Vacation Homes”.

Another method to compensate the budget for the loss of tax revenue is increased credit card information reporting. Effective for sales made on or after January 1, 2011, banks and other credit and debit card processors are required to report a merchant’s total annual card receipts to the IRS, and to the merchant, much like a business would report payments that total over $600 for the year to a non-employee sub-contractor on Form 1099-MISC.

More specific details, or any corrections if the above contains any FUs on my part, will be posted here when they become available or as I get more information.

Any questions?



Anonymous said...

Can I claim the tax credit if I'm married and my wife owns home that she purchased before we were married? I've never owned a home.

Robert D Flach said...


A good question.

This law is new and will take time to "digest".

If I come across the answer to your question in my research of the bill I will post it here.

Anyone else out there want to take this one?


Robert D Flach said...


I was just reading the National Association of Tax Professional's analysis of the housing tax bill and came across the following statement -

"If the individual is married, neither the individual nor his spouse may have had a present ownership interest in a principal residence during that three-year period."

So if you have never owned a principal residence but you wife has during the three-year "look-back" period than her ownership would disqualify you for the credit. It does not matter that she purchased or owned the principal residence before you were married.


Anonymous said...

As of November 2008, I will have owned my home for 27 years. I lived in it 2 years and rented it out about 24 years. I won no other home. Do I need to move back to my home now(before Jan.1,2009) to avoid the consequences of this Tax Act, or will I still be governed by it?

Robert D Flach said...


I assume that the 2 years you lived in the home were over 24 years ago, and it has been rented for the past 24 years. So you have not used it as your personal residence for the past 24 years – let alone 2 out of the past 5 years.

In order to be able to claim the $250,000 or $500,000 exemption on the gain from its sale you must live in it as your personal residence for 24 months during the 60 month period prior to the date of sale. As it now stands you would not qualify for any Section 121 exclusion.

In you want to qualify for Section 121 gain exclusion you would have to move back into this home and live there for 2 years before you sell it – regardless of the new Housing Act. To avoid any reduction of gain under the new Housing Act you would have to move back before January 1, 2009.

Since the definition of a period of “nonqualified use” does not include any period before January 1, 2009, you can avoid application of the new rule if you move into the residence and make it your principal residence before January 1, 2009.


Anonymous said...

Thank you (TWTP September 5 2:01 PM) for answering my question about moving back to my residence before Jan.1,2009 to avoid application of the new tax rule(HR3221).
I am a single tax payer and the house is now worth $250,000(approx.) and was purchased for $50,000. I don't expect it to appreciate much if any in the next two years. So if I sell after 2 years with a profit at or under $250,000 it will be free of tax? Sorry if this is redundant to you, but I want to make sure I understand the law.

Robert D Flach said...

Anonymous -

I suggest you read my post on Sale of Personal Residence at