On July 30, 2008, President Bush signed into law the "Housing Assistance Tax Act of 2008" which is part of a larger housing bill called "Housing and Economic Recovery Act of 2008 (H.R. 3221)." Below is information on some of the major tax aspects of the bill.

First-time Homebuyer Credit

First-time homebuyers (see definition of first-time homebuyer below) are allowed a refundable credit on the purchase of a principal residence equal to the lesser of $7,500 or 10% of the home's purchase price. If married filing separately, the maximum credit is $3,750. The credit is phased out for taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000 and $170,000 for married persons filing jointly). This tax credit applies to a principal residence purchased between April 9, 2008 and June 30, 2009. It does not matter if there was a binding contract to purchase BEFORE April 9, 2008. If a principal residence is purchased between January 1, 2009 and June 30, 2009, an election may be made to treat the purchase as occurring on December 31, 2008. Making this election allows you the credit to be claimed on a 2008 federal tax return.

First-Time Homebuyer Defined

A “first-time homebuyer” is an individual who has NOT owned another principal residence in the United States or District of Columbia at any time during the 36-month period prior to the date of purchase.

If the individual is married at time of purchase, neither the individual nor his or her spouse may have had ownership of a principal residence during the 36-month period prior to the date of purchase. Even if the individual is filing separately from their spouse, the individual MUST take into account their spouse's ownership interest in any other principal residence.

Principal Residence (Main Home)

An individual's "principal residence" is the home where he or she ordinarily lives most of the time. An individual can only have one principal residence at any one time. The home MUST be a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. For purposes of claiming the first-time homebuyer credit, the principal residence MUST be located within the United States including the District of Columbia.

What is considered the "Purchase Date"?

The "purchase date" is the date that closing occurs and title to the property is transferred to the new homeowner. If a principal residence is being constructed, the purchase date is considered to be the first date the individual occupies the home as their principal residence.

Don't Get Excited Yet; The Homebuyer Credit Needs to Be Paid Back in Most Situations!!!

Taxpayers who claim the first-time homebuyer credit generally must repay (recapture) the credit in equal installments (interest-free) over 15 years beginning 2 years AFTER the date of purchase. In essence, the government is giving qualifying first-time homebuyers an interest free loan!!

Accelerated Recapture

If the home is sold before 15 years, any remaining tax credit recapture must be repaid in the year of sale. If a taxpayer sells or no longer uses the home as their principal residence before repaying the credit, the unpaid balance becomes due in the year in which the residence is sold or is no longer used as the taxpayer’s principal residence. However, the amount of recaptured credit will not be greater than the amount of capital gain from the sale of the residence to an unrelated person.

Example: You purchased your principal residence on September 30, 2008 for $250,000 and claimed a $7,500 tax credit on your 2008 tax return. In year 2010, you recaptured $500 leaving a future potential recapture amount of $7,000. In 2011, you sell the home for a capital gain of $4,500. You will need to recapture $4,500 of the tax credit in 2011. The remaining unrecaptured tax credit is forgiven.

There are some exceptions to repayment:

• If you die, repayment of the credit is not required. If you filed a joint tax return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.

• There is no accelerated recapture of the repayment amount if the home is transferred in a divorce settlement. The spouse receiving the home is responsible for making all subsequent installment payments.

• There is no repayment if the home is destroyed or condemned and you acquire a new principal residence within 2 years of the event.

Taxpayers who are liable for the recapture tax for a tax year must file an income tax return for that year, even if not otherwise required to file.

Who CANNOT claim the first-time homebuyer credit?

• Individuals who have owned a principal residence within 3 years of the date of purchase,

• Individuals who buy and sell the same home in the same year or the home ceases to be used as a principal residence by the end of the year,

• Individuals whose principal residence is NOT located in the United States or District or Columbia,

• Individuals who acquire their principal residence by gift or inheritance,

• Individuals who are nonresident aliens,

• Individuals who purchase a home from a close relative*,

• Individuals who finance their home with tax-exempt mortgage revenue bonds,

• Individuals whose income exceeds the phase-out range. This means joint filers with modified adjusted gross income of $170,000 and above and other taxpayers with modified adjusted gross income of $95,000 and above, or

• Individuals who are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.

*Close Relative Defined

1. Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.).

2. A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock of the corporation.

3. A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interest.

New Property Tax Deduction for Taxpayers Who Do Not Qualify to Itemize Deductions

Taxpayers who do not qualify to itemize deductions are entitled to a larger standard deduction for state and local real estate taxes paid in year 2008.

The increased standard deduction is limited to the amount of real estate taxes paid during the year, OR $500 ($1,000 for a married couple filing jointly), whichever is less.

This temporary deduction is only available for tax year 2008.

Reduced Principal Residence Home Sale Exclusion for Non-Qualifying Use

Currently, taxpayers are allowed to exclude up to $250,000 ($500,000 on a married filing joint return) of gain from the sale of their principal residence. Generally, taxpayers must own and occupy the residence for at least two of the five years preceding the date of sale. A reduced exclusion is permitted for taxpayers who meet certain unforeseen circumstances.

Under the new law, taxpayers will not be allowed to exclude any gain attributable to a "nonqualified use." This will prevent taxpayers from selling a second home or vacation home and excluding all the gain even if they meet the two-out-of-five years ownership and use tests.

For purposes of determining the amount of gain that is allocated to periods of nonqualified use, gain will be allocated based on the following ratio:

1. The aggregate periods of nonqualified use during the period the property was owned by the taxpayer.

2. The period the property was owned by the taxpayer.

The amount of gain allocated to periods of nonqualified use is the total amount of gain multiplied by a fraction (1) the numerator of which is the aggregate periods of nonqualified use during the period the property was owned by the taxpayer, and (2) the denominator of which is the period the taxpayer owned the property.

A period of nonqualified use is any period beginning January 1, 2009, during which the property is NOT used as the principal residence of the taxpayer, the taxpayer's spouse, or former spouse. Since the definition of a period of nonqualified use doesn't include any period before January 1, 2009, a taxpayer can avoid this new rule if he moves into another residence he owns and makes it his principal residence before January 1, 2009. A period of nonqualified use does not include any portion of the five-year testing period which is after the last date that the property is used as the principal residence. Therefore, any period after the last date the property was used as the principal residence (regardless of use during that period) is not taken into account in determining periods of nonqualified use. This new law is effective for sales and exchanges beginning January 1, 2009.

Tax Relief for Certain Casualty Loss Reimbursements Due to Hurricanes Katrina, Wilma, and Rita

Homeowners who suffered casualty losses to their principal residences due to Hurricanes Katrina, Wilma, and Rita may have received government grants as reimbursement for those losses (example: reimbursements under the Road Home grant program). In general, when a taxpayer receives reimbursement for the loss in a later tax year, the deductible loss is not recomputed for the tax year in which the deduction was taken, instead the reimbursement amount is taken into income in the tax year it is received. For example, if the loss was claimed on your 2004 tax return and you later receive a reimbursement in 2007 for that loss, the reimbursement is included on your 2007 tax return.

The new law allows taxpayers to elect to file an amended return for the tax year in which the loss deduction was allowed (and for any tax year to which the deduction is carried) and reduce the deduction (but not below zero) by the amount of the reimbursement.

The election to file an amended return applies with respect to any grant only if any amended income tax returns with respect to that grant are filed not later than the later of:

• The due date for filing the tax return for the tax year in which the taxpayer receives the grant, or

• The date which is one year after July 30, 2008.

Any underpayment of tax resulting from the reduction of the amount otherwise allowable as a casualty loss deduction is NOT subject to any penalty or interest if the tax is paid no later than one year after the filing of the amended return to which the reduction relates. This law is effective on July 30, 2008.

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