Included in H.R. 3221, the Housing and Economic Recovery Act of 2008, were numerous additions, and amendments to real estate tax rules. Below is a brief summary of the tax provisions that were part of H.R. 3221.
Low-Income Housing Tax Credit
- Temporarily increases the volume cap for low-income housing tax credits for 2008 and 2009.
Homebuyer Tax Credit
- The tax credit only applies to first time homebuyers. A first time homebuyer is defined as a homeowner who has no present ownership in a principle residence or has not had ownership of a principle residence for at least 3-years.
- The tax credit is 10% of the purchase price, capped at $7,500. The tax credit is reduced when the buyers adjusted gross income (AGI) is over $75,000 ($150,000 married filing jointly). The amount is reduced by the amount over the allowed AGI divided by $20,000.
- The tax credit does need to be repaid, therefore working more as an interest free loan than a true tax credit. The credit is repaid out of your taxes over 15-years, or a rate of 6.66% of the credit per year. If the home is sold before the credit is paid back, payments are accelerated in the following taxable years by the amount still owed on repayment over the original amount of the credit. However, if your gain on the house does not exceed the amount still owed at the time of sale, you will not owe any more repayment on the credit.
- The home must be purchased between April 8, 2008 and June 30, 2009. The purchase must be of an owner occupied primary residence.
- You cannot get the credit is the property is purchased from a relative, the purchase is financed by a tax exempt qualified mortgage issue/bond, the taxpayer is a nonresident alien, or if the taxpayer disposes of the residence before the close of the taxable year.
Standard Deduction for Property Taxes
- Creation of a new standard deduction for property taxes by nonitemizers in the amount of the taxes, capped at $500 ($1000 for joint filer).
FIRPTA FIX
- Modifies FIRPTA to allow the documents to be given to a qualified substitute instead of the buyer.
Second Home Conversion Tax Offset
- One of the offsets included in H.R. 3221 was the closing of a tax loophole concerning the conversion of a second home to a primary residence and the capital gains exclusion. This offset ONLY applies when a second home is converted to a primary residence and does not affect the capital gains exclusion when a home has only been a primary residence.
- The loophole allowed it so that if a second home was converted to a primary residence and was used as such for at least two out of the previous five years; the homeowner could use the $250,000/$500,000 capital gains exclusion.
- H.R. 3221 closes that loophole and will now only allow the capital gains exclusion to apply to gain received once the house became a primary residence
- Any gain earned prior to January 1, 2009 would be affected by this provision and there are some exclusions of this policy for extended military service (with limitations) as well as change of employment, health conditions or other unforeseen circumstances (not to exceed an aggregate period of two years).
- There is also an allowance of 5-years of gain if a property is converted from a principle residence to a second home.
- The new formula to calculate the gain allowed to be included in the capital gains exclusion would be: Profit from the sale multiplied by the number of days the home was a primary residence over the number of days the home was owned.
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