President Signs Housing Act

A new law designed to aid the ailing housing market and prevent foreclosures for 400,000 homeowners became effective on July 30 when President Bush signed the Housing Assistance Act of 2008. The new law also provides tax breaks for 2008.

Housing initiatives

The main thrust of the new law is to provide relief to the housing industry. The Department of Housing and Urban Development expects to have the mechanism in place to begin aiding homeowners in about nine weeks. Key provisions include:

• Foreclosure rescue. These homeowners may be rescued by obtaining lower-rate, fixed-rate mortgages in place of their current adjustable rate mortgages. Lenders that choose to participate in this new Federal Housing Administration (FHA) program must lower the outstanding balance of the debt; lenders have these loans guaranteed by the FHA. The relief applies only to principal residences and not to vacation homes or rental property.
• Fannie Mae and Freddie Mac changes. The size of home loans guaranteed by these government-chartered corporations is increased to $625,000. They can also buy back mortgages, freeing lenders to make new loans. And the law gives government-backing to securities issued by Fannie Mae and Freddie Mac (the Treasury can infuse capital or loan them money to help with liquidity).
• Community help. Communities can obtain money to buy homes in foreclosure, rehabilitate them, and sell them to low- or moderate-income individuals. This measure is designed to prevent the negative impact that foreclosures can have on the property values for neighbors.
• Pre-foreclosure counseling. Homeowners heading for trouble can obtain counseling to find solutions to their financial problems. (Funding has been provided for this purpose).

Tax breaks for 2008

You may be eligible for special tax breaks on your 2008 return, including:

• First-time homebuyer credit. A refundable credit can be claimed in the year of buying a first home (which means no home ownership within the past three years prior to the year of purchase). The credit is the lesser of $7,500 ($3,750 for married filing separately) or 10% of the purchase price of the residence. The credit is phased out for homeowners with modified adjusted gross income in the year of purchase between $75,000 and $95,000 ($150,000 and $170,000 for joint filers). Caution: The credit, however, is only a loan; it must be repaid ratably over 15 years starting in the second year after the purchase. For example, if a $7,500 credit is taken in 2008 on a joint return, $500 is reported in 2010, and for the next 14 years until it is fully recaptured. The credit applies to purchases on or after April 9, 2008, and before July 1, 2009.
• Additional standard deduction for state and local real property taxes. Homeowners who don't itemize deductions can increase their 2008 standard deduction by $500 ($1,000 on a joint return) for real estate taxes they've paid. Taxpayers who itemize do not benefit from this new tax break.
• AMT offset for certain credits. The low-income housing tax credit and rehabilitation credit may offset alternative minimum tax (AMT) liability. This break also applies beginning this year. (The properties for the low-income housing credit must be placed in service after December 31, 2007, and the rehabilitation expenses for the rehabilitation credit must also be after December 31, 2007.) Also, interest on exempt facility bonds issued to provide qualified residential rental projects, qualified mortgage bonds, and qualified veterans' mortgage bonds are no longer treated as an item preference for purposes of the AMT, effective for bonds issued after the date of enactment.

Tax changes for the future

Home sales in 2009 and later may be impacted by a new law change that deprives a homeowner of the portion of the home sale exclusion from the gain allocable to any period of nonqualified use (use of the home as a vacation home or rental property). Temporary absences from the home, absences due to a job change, health or unseen circumstances are disregarded, and leaving the home vacant after moving before a sale do not count. Only nonqualified use after 2008 is taken into account.

Even though a homeowner may lose a portion of the home sale exclusion because of nonqualified use, the remaining exclusion may still be sufficient to make the gain fully tax free, depending on the circumstances.

Source: Housing Assistance Act of 2008 (HR 3221)