Basics and Beyond Income Tax Seminars

On Wednesday, July 30th, the president signed into law the omnibus and very complicated HR5221 known as the Housing and Economic Recovery Act of 2008 .

In addition to provisions designed to shore up the ailing housing market, tighten lending practices, reform financial institutions associated with that market, provide help for some debt-plagued homeowners, provide authority for Treasury to make sure that Freddie-Mac and Freddie-Mae don't fail, and numerous other non-tax authorizations, the new law also contains a 96-page tax section called the Housing Assistance Tax Act of 2008 (referred to as the Housing Act in this analysis.)

The Housing Act contains tax breaks for homebuyers and homeowners, liberalized low-income housing tax credit rules, relaxed requirements for tax-exempt bonds, eased AMT rules, and revamped REIT rules, as well as other specialized provisions. The $14-billion-plus price tag for the tax section is fully offset with new rules requiring information reporting of payment card and third party network transactions, a delay in the application of worldwide allocation of interest, and rejiggered 2012 and 2013 estimated tax rules for large corporations.

Here's a summary of tax changes contained in the Housing Act.

Tax Changes for Individuals

First-time homebuyers get a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). The credit, which is generally allowed for the tax year in which the principal residence is bought, phases out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase. The homebuyer credit is recaptured ratably over fifteen years with no interest charge beginning in the second tax year after the tax year in which the home is purchased. For each tax year of the 15-year recapture period, the credit is recaptured as an additional income tax amount equal to 6 2/3% of the amount of the credit. Accelerated recapture provisions apply if the home is sold during the recapture period. The credit applies to eligible first-time homebuyers who purchase a principal residence after Apr. 8, 2008, and before July 1, 2009. A special rule allows those who purchase a principal residence after Dec. 31, 2008, and before July 1, 2009, to treat the purchase as made on Dec. 31, 2008 (effectively allowing them to claim the credit on their 2008 returns rather than on their 2009 returns).
The Act permits taxpayers who claim the standard deduction instead of itemizing deductions to claim an additional standard deduction for State and local property taxes paid. The deduction, which applies only to tax years beginning in 2008, can't exceed the lesser of State and local property taxes actually paid or $500 ($1,000 for joint return filers).
For sales and exchanges after 2008, the Act provides that if a taxpayer moves his principal residence to a second home (e.g., vacation home), and later sells that second home, he will not be able to use the Code Sec. 121 homesale exclusion to the extent that it relates to the nonqualified use period of the residence. Generally, the nonqualified use period is any period, other than the portion of the period before Jan. 1, 2009, that the property is not used as the principal residence of the taxpayer or spouse.

Eased AMT Rules

Under the Act, the Code Sec. 42 low-income housing tax credit and Code Sec. 47 rehabilitation credit may offset alternative minimum tax (AMT) liability (under current law, they can't). The Act accomplishes this result by treating the tentative minimum tax as being zero for determining the tax liability limit for the low-income housing credit and the rehabilitation credit. The AMT change applies for low-income housing credits determined under Code Sec. 42 attributable to buildings placed in service after Dec. 31, 2007, and for rehabilitation credits determined under Code Sec. 47 attributable to qualified rehabilitation expenses properly taken into account for periods after Dec. 31, 2007.
For bonds issued after the enactment date, the Act provides that tax-exempt interest earned on the following bonds is not a preference item for AMT purposes: exempt facility bonds issued as part of an issue 95% or more of the net proceeds of which are used to provide qualified residential rental projects (as defined in Code Sec. 142(d) ); qualified mortgage bonds (as defined in Code Sec. 143(a) ); and qualified veterans' mortgage bonds (as defined in Code Sec. 143(b) ). Additionally, tax-exempt interest earned on the above three types of bonds is not included in the corporate AMT adjustment based on current earnings.

Business and Investment Changes

For returns for calendar years beginning after 2010, the Act requires banks and online payment networks to file an information return with IRS reporting the gross amount of credit and debit card payments a merchant receives during the year, along with the merchant's name, address, and taxpayer identification number (TIN). Reporting is also required for third party network transactions. Information reporting for third party network transactions will be required only for merchants that (1) have annual credit and debit card transactions exceeding $20,000 in the aggregate, and (2) the aggregate number of such transactions during the year exceeds 200.
The American Jobs Creation Act of 2004 gave taxpayers an election to take advantage of a liberalized rule for allocating interest expense between U.S. sources and foreign sources for purposes of determining a taxpayer's foreign tax credit limitation. Under current law, this election is not available to taxpayers until tax years beginning after 2008. The Act delays the phase-in of this new liberalized rule for two years (to tax years beginning after 2010). Special transition rules apply in the first year that the liberalized rule phases in.
For tax years ending after Mar. 31, 2008, the Act allows a taxpayer to elect to accelerate the recognition of a portion of its historic AMT or research and development (R&D) credits in lieu of the bonus depreciation tax benefit that was included in the Economic Stimulus Act of 2008. The amount that a taxpayer receives is calculated based on the amount that it invests in property that would otherwise qualify for bonus depreciation under the Economic Stimulus Act of 2008. This amount is capped at the lesser of 6% of historic AMT and R&D credits or $30 million.
The Act liberalizes the real estate investment trust (REIT) rules by clarifying that REITs can earn foreign currency income associated with real estate activities, increasing the permissible size of REIT investments in taxable REIT subsidiaries, modifying the REIT safe harbor for dealer sales, and extending the special rules for lodging facilities to health care facilities.
The Act tinkers once again with the estimated tax payment rules for large corporations. First, it repeals the changes made by prior legislation for required installments of estimated tax for July, August, and September of 2012, and second, it increases the required installments of estimated tax for July, August, and September of 2013, as in effect on the enactment date, by 16.75%.

Tax Credits and Financing Mechanisms for Housing

The state-by-state limit on the annual amount of Federal low-income housing tax credits that may be allocated by each state is increased from $2 per person to $2.20 per person for 2008 and 2009. States with small populations are provided with a special set-aside. The Act increases the small state set-aside by 10%.
The Act carries numerous changes to the technical rules relating to low income housing tax credits.
For expenses properly taken account for periods after Dec. 31, 2007, the Act allows taxpayers to qualify for the full amount of the rehabilitation credit so long as less than 50% of the rehabilitated building (increased from 35%) is leased to State and local governments or other tax-exempt entities.
The Act clarifies that where a state issues a series of short-term bonds for low-income housing projects, these bonds will only be counted once against the limitation on the annual amount of tax-exempt housing bonds that each state may issue. The Act also updates the tax-exempt housing bond rules to conform certain aspects of these rules to the low-income housing tax credit rules.
The Act increases the national limit on the annual amount of tax-exempt housing bonds that each state may issue. The national limit for 2008 is increased to allow for the issuance of an additional $11 billion of tax-exempt bonds to provide loans to first-time home buyers and to finance the construction of low-income rental housing. The Act also temporarily allows qualified mortgage revenue bonds to be used to refinance certain subprime loans.
The Act temporarily allows bonds that are guaranteed by Federal home loan banks to be eligible for treatment as tax-exempt bonds regardless of whether the bonds are used to finance housing programs. The Act also temporarily allows qualified mortgage revenue bonds to be used to help individuals purchase new homes in Presidentially-declared disaster areas.

GO Zone Provisions

The Act allows victims of Hurricanes Katrina, Wilma, or Rita the opportunity to adjust—interest and penalty free—casualty loss deductions claimed for their principal residences to reflect subsequently received grant payments to cover uninsured losses caused by the hurricanes. They can use amended income tax returns to take into account receipt of certain hurricane-related casualty loss grants by disallowing previously taken casualty loss deductions.
For property placed in service after 2007, the Act waives the deadline on the construction of GO Zone property which is eligible for bonus depreciation.
For purposes of the tax exempt bond financing provisions of the GO Zone Act of 2005, and effective as if included in that Act, the definition of the GO Zone includes two additional Alabama counties (Colbert and Dallas).

Click Here for more information about the 2008 Housing Act is available at