2. The FHA could insure $300 billion in such mortgages, which would be available to homeowners who showed they could afford a new loan. Banks would first have to agree to take a large loss on the existing loans in exchange for avoiding an often-costly foreclosure.
3. The plan also is
designed to relieve a broader credit crunch that has taken hold because
of rising defaults and falling home values. To free up safer and more
affordable mortgage credit, the bill permanently would increase to $625,000
the size of home loans that Fannie Mae and Freddie Mac can buy and the
FHA can insure. They also could buy and back mortgages 15% higher than
the median home price in certain areas.
The bill goes far beyond just addressing the current crisis, however.
The legislation overhauls the Depression-era FHA. It requires lenders
to show how high a borrowers payments could get under the terms of their
mortgages and it provides $180 million in pre-foreclosure counseling for
struggling homeowners.
The Treasury Department gains unlimited power, until the end of 2009,
to lend money to Fannie Mae and Freddie Mac or buy their stock should
they need it. The Federal Reserve takes on a new "consultative"
role overseeing the companies.
Tax Incentives and Revenue Raisers
The measure includes $15.1 billion in housing tax incentives, including
a credit of up to $7,500 for first-time home buyers for houses purchased
between April 9, 2008, and July 1, 2009, a significant expansion of the
low-income housing tax credit, new provisions for tax-exempt housing and
mortgage revenue bonds and real estate investment trust (REIT) reform
among other items.
First-time homebuyer tax credit. One tax incentive in the new law,
the first-time homebuyer tax credit, has been getting a lot of attention
in the news but be careful. The credit, while generous, is essentially
an interest-free loan from the government. Taxpayers who take the credit,
which equals 10 percent of the purchase price (up to $7,500 for single
individuals and married couples filing jointly; $3,750 for married individuals
filing separate returns) must repay the credit. They will have 15 years
to repay the credit in equal amounts. If a taxpayer sells his or her home
before the end of the 15-year period, he or she will likely have to immediately
repay any outstanding balance. Important income thresholds also apply.
Additionally, the credit is temporary and applies to homes purchased on
or after April 9, 2008 and before July 1, 2009. There are also complex
rules about who can take it, when they can claim it and so on. Please
contact your W&D representative if you have any questions about this
potentially valuable but complicated new credit.
Property
deduction for non-itemizers. Significantly less complicated is a new
standard property deduction for taxpayers who do not itemize deductions.
Before the new law, only itemizers could deduct state and local property
taxes. The housing act gives non-itemizers a limited deduction for state
and local property taxes by increasing the amount of their standard deduction
by the lesser of the amount of property taxes they paid or $500 ($1,000
for a married couple filing jointly). If you have paid off your mortgage
and no longer itemize, you might benefit from this new deduction. As now
written, however, this is a one-year shot in the arm, available only for
taxes paid in 2008.
Home sale exclusion. The home sale exclusion is one of the most
popular tax breaks in the Tax Code. A married couple filing jointly can
generally exclude up to $500,000 in gain (single individuals up to $250,000)
provided they physically lived in the home for 2 of the previous 5 years.
Savvy real estate investors used this tax rule by moving between residences
every two years. Even "regular" homeowners were coached to stay
in their homes for at least 2 years for tax reasons.
The housing act closes what some call a "loop hole." The new
capital gains exclusion formula is not an all-or-nothing proposition.
Instead, it's a ratio. In other words, if a home seller occupied a property
as a primary residence in 2 of the last 5 years, under the new system,
he would be entitled to 40% of his capital gains tax-free versus 100 percent
of those gains. The new law 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.
As good news to those who have already owned property for a while and
have seen it appreciate, non-qualifying use before the January 1, 2009
effective date of the provision is not used in the calculation; neither
are periods after a qualified use of the property or temporary absences
of less than two years.
Businesses. The Economic Stimulus Act of 2008 included bonus depreciation
to encourage businesses to increase investment. However, companies in
a loss position cannot take advantage of bonus depreciation because they
do not have any taxable income against which to take the deductions. The
housing act allows taxpayers (corporations) to use accumulated alternative
minimum tax (AMT) credits as well as research and development (R and D)
tax credits to make investments that would qualify for bonus depreciation,
if the taxpayers were profitable.
The new law also dramatically changes the information reporting requirements of banks and other processors of merchant payment card transactions. Starting in 2011, they will be required to report a merchant's annual gross payment card receipts to the IRS and the merchant. Congress believes that enhanced information reporting will help close the $300 billion tax gap, the difference between what taxpayers owe and what they actually pay.
Real estate investment trusts. A real estate investment trust (REIT) holds passive investments in real property equity and mortgages. Like the rules for tax-exempt bonds and the LIHTC, the rules for REITs are complex. If a REIT violates these rules, the tax consequences can be severe. The housing act clarifies some the rules, such as allowing REITs to treat certain foreign currency gains as qualified income for purposes of income tests. Congress also clarified other aspects of the income tests and authorized the IRS to determine if other items should be treated as qualified income for purposes of the income tests, among other changes.
Down payment assistance. Seller-funded down-payment-assistance programs provide cash assistance to homebuyers who cannot afford to make the minimum down payment or pay the closing costs involved in obtaining a mortgage. Despite their popularity, these programs have been criticized for helping to inflate home prices. In 2006, the IRS ruled that organizations that provide seller-funded down-payment assistance to home buyers do not qualify as tax-exempt charities. The new law bans seller-funded down payment assistance programs.
Affordable housing. Tax-exempt housing bonds and the low-income housing tax credit (LIHTC) help to fund the construction of affordable housing units. The rules for tax-exempt housing bonds and the LIHTC are extremely technical. The housing act simplifies these rules and makes other changes, such as excluding excludes tax-exempt interest on certain housing bonds from being a preference item for AMT purposes. The housing act also allows taxpayers to use the LIHTC and the rehabilitation tax credit to offset AMT liability. Congress also enhanced the rehabilitation tax credit and some special tax breaks for taxpayers in the Gulf Opportunity Zone.
As you can see, the
housing bill is far-reaching in scope. If you have any questions about
the new law, please contact our office at 847-267-9600. For a detailed
special report on provisions of the new law visit:
http://tax.cchgroup.com/legislation/2008-Housing-Assistance-Act.pdf