On Wednesday, July 30, 2008, President Bush signed into law the Housing and Economic Recovery Act of 2008, which includes the Housing Assistance Tax Act of 2008 (the Act). The Act contains a number of new tax provisions designed to assist the ailing housing market as well as revenue offsets to these provisions. A number of key provisions of the Act are summarized below.

Tax Benefit Provisions

First Time Homebuyer Credit

The Act provides a refundable tax credit equal to 10 percent of the purchase price of a home (up to $7,500) for first time homebuyers. The credit applies to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving the tax credit will be required to repay any amount taken as a credit under this provision to the government over 15 years in equal installments. As a result, this credit is essentially a 15-year interest-free loan from the government. The ability to obtain the credit begins to phase out for taxpayers with gross income in excess of $75,000 ($150,000 in the case of married taxpayers filing jointly) and is completely phased out for taxpayers with gross income of $95,000 ($170,000 for married taxpayers filing jointly). Since the funds reduce the tax liability for the year but do not put cash in the hands of the buyers at closing, new financial products will likely be introduced that will advance the funds in anticipation of the refund.

Standard Deduction Plus Limited Real Property Tax Deduction

Currently, a deduction for state and local property taxes is only available to taxpayers whose itemized deductions exceed the standard deduction. The Act provides the standard deduction for 2008 may be increased for certain state and local real property taxes. The maximum increase that may be claimed is $500 ($1,000 for married filing jointly). The main beneficiaries of this provision will be individuals who own their homes but who no longer itemize because they have largely paid for their house and have low or no home interest deductions.

Ten Percent Temporary Increase in Low Income Housing Tax Credit

There is a state-by-state limit on the annual amount of federal low income housing tax credit that can be allocated to each state for low income housing within the state. The Act increases the limitation in 2008 and in 2009 by an additional 10 percent. This provision is an incentive for additional new low income housing.

The Low Income Housing Tax Credit Offset to AMT

Under current law, business tax credits cannot offset the alternative minimum tax (AMT). Under the Act, the low income housing tax credit and rehabilitation credit will offset AMT liability. This new change will apply to buildings placed in service after Dec. 31, 2007 and for rehabilitation credits to the extent attributable to qualified rehabilitation expenses properly taken into account for periods after Dec. 31, 2007. This measure should lower the interest rate on new bonds issued for such periods.

Revenue Offsets

Amendment to Exclusion of Gain on Sale of Principal Residence

Presently, an individual taxpayer may exclude up to $250,000 ($500,000 in the case of married taxpayers filing jointly) of gain realized on the sale or exchange of a principal residence. Eligibility for this exclusion is dependent upon the taxpayer having owned and used the residence as a principal residence for at least two of the five years ending on the day of the sale or exchange. This exclusion applies even if a home was initially purchased as a second home (i.e., a vacation home). Under the Act, a taxpayer who moves their principal residence to a second home will be able to utilize this exclusion only to the extent that it relates to the period of time when the home was used as a principal residence and to the extent that it relates to the period of time that the home was owned prior to Jan. 1, 2009. It is important to note, however, that once a taxpayer moves their principal residence to a second home, any period of use (regardless of the type of use) or non-use following such move will be eligible for the exclusion. Interestingly, in a bill designed to support the housing market, this makes second homes a little less attractive.

An illustration of the exclusion is available at this link.

Information Reporting on Payment Card Transactions

Beginning on Jan. 1, 2011, any processor, bank and payment intermediary (e.g. PayPal) making payment to merchants who accept payment cards (e.g., a credit card, a debit card, etc.) goods or services will be required to report annually to the IRS and to the merchants the gross amount of such transactions, as well as the name, address, and taxpayer identification number of the merchant (subject to de minimis exceptions). This measure will report on the credit and debit card income of businesses.

Delay of Worldwide Interest Allocation

The American Jobs Creation Act of 2004 contained a provision permitting the common parent of a U.S. domestic affiliated group to allocate interest expense on a worldwide basis, including non-U.S. members of the affiliated group. This provision was to become effective for tax years beginning after Dec. 31, 2008. The Act delays the effective date of this election to taxable years beginning after Dec. 31, 2010. This provision represents a tax increase on international companies of $7.3 billion over ten years.

Modification in Estimated Tax Payments for Corporations with $1 billion or more in Assets

The Act makes certain modifications to the estimated tax payments that must be made in 2012 and 2013 by corporations with assts of at least $1 billion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.