Housing Act Contains Tax Provisions

On July 30, 2008, the president signed into law the Housing Assistance Tax Act of 2008, P.L. 110-289. Although most of the act deals with larger housing slump issues, such as funding for Federal Housing Administration loans and backing for Fannie Mae and Freddie Mac, it contains tax provisions affecting homeowners and first-time homebuyers, as well as changes to the rules governing the low-income housing credit, tax-exempt bonds, and the alternative minimum tax (AMT). It also imposes a new reporting requirement on financial institutions that process credit card transactions.

2008 Property Tax Standard Deduction

The act allows nonitemizing homeowners to take an additional standard deduction of up to $500 ($1,000 for married taxpayers filing jointly). The additional standard deduction is for state and local real property taxes (and is limited to the amount of such taxes that would be deductible by the taxpayer if he or she itemized, up to $500).

The deduction applies only to tax years beginning in 2008. The real property tax standard deduction is not available if the taxpayer has already deducted the taxes as a trade or business expense under Sec. 62(a).

Since most homeowners who are paying off mortgages itemize in order to take advantage of the Sec. 163(h)(3) mortgage interest deduction, this provision is likely to benefit homeowners who own their homes outright.

Homebuyers’ Credit

The act gives first-time homebuyers a refundable credit of 10% of the purchase price of the home, up to $7,500 ($3,750 for married taxpayers filing separately) (Sec. 36). The credit phases out for homebuyers with modified adjusted gross income (AGI) between $75,000 and $95,000 (between $150,000 and $170,000 for joint filers).

The credit applies for both regular tax and AMT purposes. The credit works like an interest-free loan because, if the credit is taken, it will be recaptured over the next 15 years, starting in the second tax year after the home is purchased. If the home is sold before the end of the 15-year recapture period, the outstanding amount of the credit is recaptured at that time (but is limited to the amount of gain from the sale).

To be eligible, a taxpayer must be a first-time homebuyer, defined as someone who has not had a present ownership interest in a principal residence during the three-year period ending on the date the principal residence is purchased (Sec. 36(c)(1)). Also, the taxpayer must not have purchased the residence from a related party.

The residence purchased must be in the United States and must be purchased between April 8, 2008, and July 1, 2009. However, taxpayers who purchase a residence in 2009 (before July 1) may elect to treat the purchase as having taken place on December 31, 2008, for purposes of the credit.

Unmarried individuals may jointly purchase a residence and allocate the $7,500 credit between them (Sec. 36(b)(1)(C)).

Partial Gain from Sale of Principal Residence

The act also changes the rules for the partial exclusion of gain from the sale of a residence. For sales of residences after December 31, 2008, the Sec. 121 exclusion of gain will not apply to any gain allocated to a period of “nonqualified use” (as defined below) (Sec. 121(b)(4)(A)). Prior to this, taxpayers simply had to meet the two-year ownership and use tests in order to qualify for the partial exclusion.

Under the new rules, taxpayers will have to determine the amount of gain (if any) that is allocable to periods of nonqualified use. Gain will be allocated to periods of nonqualifed use based on the ratio that aggregate periods of nonqualified use bear to the period the taxypayer owned the property (Sec. 121(b)(4)(B)(ii)).

A period of nonqualified use is defined as any period in which the property is not used as the taxpayer’s principal residence (or as the principal residence of the taxpayer’s spouse or former spouse) (Sec. 121(b)(4)(C)). Note, however, that no period before January 1, 2009, will be considered a period of nonqualified use. And periods when the homeowner did not live in the residence due to military service, change of employment, health conditions, or other unforeseen circumstances do not count as periods of nonqualified use (Sec. 121(b)(4)(C)(ii)).

This new provision will reduce the amount of gain that taxpayers can exclude when they move into what had been their second home. Some gain from periods before the second home became the principal residence will have to be recognized, based on the ratio in Sec. 121(b)(4)(B)(ii).

Treatment of Hurricane Reimbursement Grants

The act allows homeowners who took a casualty deduction as a result of Hurricanes Katrina, Rita, or Wilma and who later received a reimbursement grant under various appropriations bills (P.L. 109-148, 109-234, or 110-116) to choose whether to include the grant in income or to file an amended return for the tax year in which the casualty loss deduction was allowed and reduce the amount of the deduction by the amount of the grant. The Service has not yet issued guidance on how to make this election.

Low-Income Housing Credit Changes

The act makes various changes to the Sec. 42 low-income housing credit. Among them, the act allows taxpayers to use the low-income housing tax credit to offset AMT (effective for low-income housing credits attributable to buildings placed in service after December 31, 2007) (Sec. 38(c)(4)(B)).

Tax-Exempt Housing Bond Rules

The act provides that tax-exempt interest on certain specified private activity bonds is not a preference item for AMT purposes (Sec. 57(a)(5)(C)(iii)). The bonds covered by the provision are:

1. Exempt facility bonds that are part of an issue at least 95% of the net proceeds of which are to be used to provide qualified residential rental projects;
2. Qualified mortgage bonds; and
3. Qualified veteran mortgage bonds.

This provision is effective for bonds issued after July 30, 2008.

The mortgage bond rules for residences located in disaster areas are extended to bonds issued after May 1, 2008, and before January 1, 2010 (Sec. 143(k)(11)). The act also provides that certain bonds issued between July 30, 2008, and January 1, 2011, that are federally guaranteed by federal home loan banks can qualify as tax-exempt bonds (Sec. 149(b)(3)(A)).

Miscellaneous

The act makes various changes to the rules regarding real estate investment trusts (REITs). It also allows corporations to elect, for the first tax year beginning after March 31, 2008, to accelerate AMT and research credits in lieu of bonus depreciation (Sec. 168(k)(4)(A)). Such accelerated credits generated through December 31, 2005, will be refundable (subject to limitation).

The act removes the December 31, 2007, deadline for starting certain selfconstructed GO Zone extension property (Sec. 1400N(d)(3)(B)).

The act delays the ability of worldwide affiliated groups to elect to allocate interest expense on a worldwide basis until after 2010 (Sec. 864(f)(5)(D)). There is a special phase-in rule, under which an adjustment is made to foreign-source income.

The act retroactively raises the rehabilitation credit tax-exempt use safe harbor for nonresidential real property from 35% to 50% for expenditures properly taken into account after December 31, 2007 (Sec. 47(c)(2)(B)(v)(I)).

Like most tax acts these days, the act amends the third-quarter 2012 corporate estimated tax payment rules. This estimated tax payment requirement applies to corporations with assets of at least $1 billion. The act repeals previous changes to the thirdquarter 2012 factor (in Section 401(1)(B) of the Tax Increase Prevention and Reconciliation Act of 2005, P.L. 109-222, as amended) but increases the third-quarter 2013 estimated tax payment to 117.75% of the amount otherwise due. The subsequent estimated tax payment is correspondingly reduced (this moves the payment into the government’s 2013 fiscal year).

Credit Card Information Reporting Rules

As a revenue raiser, the act will impose a new reporting requirement after 2011. The act requires financial institutions that process merchant credit and debit card transactions to annually report to the IRS the gross amount of each merchant’s credit card receipts processed. (The merchant will also receive a copy of the report.)

The report will have to include the name, address, and taxpayer identification number (TIN) of the merchant. If the financial institution cannot provide the merchant’s TIN to the IRS, it will be required to withhold from payments to the merchant at a rate of 28%.

There is a de minimis exception where the aggregate value of a merchant’s transactions does not exceed $20,000 for the calendar year or the number of transactions does not exceed 200.

This provision is designed to help the Service identify merchants’ unreported income.