2008 Housing Assistance Tax Act

California CPA magazine: October 2008

The following are selected highlights of the 2008 Housing Assistance Tax Act (P.L. 110-289), signed into law July 30, 2008.

First-time Homebuyer Credit
Under this new law, an individual taxpayer who is a first-time homebuyer of a principal residence in the United States is allowed a refundable tax credit equal to the lesser of:
•     $7,500 ($3,750 for a married individual filing separately); or
•     10 percent of the residence’s purchase price.

Generally, this credit is allowed for the tax year in which the taxpayer purchases the home. The credit is phased out for individuals with year-of-purchase modified adjusted gross income (AGI) between $75,000 and $95,000, or between $150,000 and $170,000 for joint filers. Modified AGI is AGI increased by any amount excluded from gross income under IRC Secs. 911, 931 or 933.

An individual is considered a first-time homebuyer if he or she (and if married, his or her spouse) had no present ownership interest in a principal residence in the U.S. during the three-year period ending on the date of the purchase of the principal residence to which this credit applies.

The credit is not allowed if:
1.     The residence is financed from the proceeds of tax-exempt mortgage revenue bonds;
2.     The taxpayer is a nonresident alien;
3.     The taxpayer disposes of the residence or the residence ceases to be the principal residence of the taxpayer (and, if married, the taxpayer’s spouse) before the close of a tax year for which the credit otherwise would be allowable; or
4.     The District of Columbia’s homebuyer credit is allowable for the tax year the residence is purchased or for any prior tax year.

For purposes of this credit, the term “purchase” means any acquisition, but only if:
1.     The property is not acquired from a related person; and
2.     The property’s basis in the acquiror’s hands is not determined:
      •     In whole or in part by reference to     the property’s adjusted basis in the transferor’s hands; or
      •     Under Sec. 1014(a), relating to property acquired from a decedent.

For purposes of this credit, persons are treated as “related” if their relationship would result in the disallowance of losses under Secs. 267 or 707(b).

However, in applying Sec. 267(b) and (c) for this purpose, Sec. 267(c)(4) is treated as providing that an individual’s family shall include only his or her spouse, ancestors and lineal descendants—thus excluding siblings.

The credit is recaptured ratably over 15 years, without any interest charged, beginning in the second tax year after the tax year in which the home is purchased.

Example: T purchases a principal residence in 2008. The credit is allowed on T’s 2008 income tax return. The credit is recaptured beginning with T’s 2010 income tax return.

If the taxpayer sells the home or if the home ceases to be used as the principal residence of the taxpayer or his/her spouse before the credit is completely recaptured, any remaining unrecaptured credit is due with the income tax return for the year in which the home is sold or ceases to be used as the principal residence.

However, such recapture cannot exceed the gain from the residence’s sale if sold to an unrelated person. For this purpose, the gain is determined by reducing the residence’s basis by any unrecaptured credit.

There is no recapture after the taxpayer’s death. If the home is involuntarily converted, recapture is not accelerated if a new principal residence is acquired during the two-year period beginning on the date that the taxpayer disposes of the old home or it ceases to be used as the principal residence of the taxpayer (and, if married, the taxpayer’s spouse).

In the case of a transfer of the residence to a spouse or to a former spouse incident to a divorce, the transferee spouse, and not the transferor spouse, will be responsible for any future recapture.

This credit is available for qualifying home purchases after April 8, 2008, and before July 1, 2009—without regard to whether or not there was a binding contract to purchase before April 9, 2008.

An election is provided to treat a home purchased after 2008 and before July 1, 2009, as if purchased on Dec. 31, 2008, to claim this credit for 2008 and establishing the beginning of the recapture period. Taxpayers may amend their returns for this purpose.

Additional Standard Deduction for State and Local Real Property Taxes
Existing Law: Generally, real property taxes are deductible as itemized deductions if the taxpayer elects to claim itemized deductions, instead of the standard deduction, from gross income in determining AGI. However, if these taxes are attributable to business or rental income, they are allowed in computing AGI and, therefore, cannot be itemized deductions.

New Law: The Housing Act increases an individual’s standard deduction, but only for a tax year beginning in 2008 by the lesser of:
•     The amount allowable as a deduction under Sec. 164(a)(1) for state and local real property taxes; or
•     $500, or $1,000 for a married individual filing jointly.

No taxes deductible in computing AGI are taken into account in computing this increased standard deduction.

No Exclusion of Gain on Sale of Principal Residence for Nonqualified Use
Existing Law: An individual may exclude up to $250,000 ($500,000 if married filing jointly) of gain realized on the sale or exchange of a principal residence.
To qualify for this exclusion, the individual must have owned and used the residence as a principal residence for at least two of the five years ending on the date of the sale or exchange.

An individual who fails to meet these requirements because of a change of place of employment, health or, to the extent provided under regulations, unforeseen circumstances can exclude an amount equal to the fraction of $250,000 (or $500,000 if married filing jointly) that is equal to the fraction of the two years that the ownership and use requirements are met.

An election is available to members of the uniformed services, the Foreign Service and certain employees of the intelligence community (for sales and exchanges before 2011). If this election is made, the five-year period ending on the date of the sale or exchange of a principal residence does not include any period up to 10 years during which the individual or his/her spouse is on qualified official extended duty.

For these purposes, qualified official extended duty is any period of extended duty while serving at a place of duty at least 50 miles away from the individual’s principal residence or under orders compelling residence in government furnished quarters.

This election may be made with respect to only one property for a suspension period.

The exclusion does not apply to gain attributable to depreciation allowable with respect to the rental or business use of a principal residence for periods after May 6, 1997.

New Law: Under the Housing Act, gain from the sale or exchange of a principal residence after 2008 that is allocated to periods of nonqualified use is not excluded from gross income. The amount of gain allocated to periods of nonqualified use is the amount of gain multiplied by the following fraction: Aggregate periods of nonqualified use during the period the property was owned by the individual divided by the period that the individual owned the property.

A period of nonqualified use is any period after 2008 during which the property is not used by the individual or his/her spouse or former spouse as a principal residence. For purposes of determining periods of nonqualified use, the following periods are not taken into account:
•     Any period after the last date that the property is used as the individual’s or his/her spouse’s principal residence, regardless of use during that period; and
•     Any period, not to exceed two years, that the individual is temporarily absent because of a change in place of employment, health or, to the extent provided in regulations, unforeseen circumstances.

The existing law’s election for the uniformed services, Foreign Service and certain intelligence community employees is unchanged.

Since the exclusion does not apply to any gain attributable to post-May 6, 1997 depreciation, such gain is ignored in determining the gain allocated to nonqualified use.

Example 1: T buys a property Jan. 1, 2009 for $400,000 and uses it as a rental property for two years, claiming $20,000 of depreciation. On Jan. 1, 2011, T converts the property to his principal residence. On Jan. 1, 2013, T moves out and then sells the property for $700,000 on Jan. 1, 2014.

T’s total gain realized is computed as follows:

Of this gain, $20,000 is attributable to depreciation and, thus, is included in income. Of the remaining $300,000 gain, 40 percent (two years divided by five years) or $120,000 is allocated to nonqualified use and is not eligible for the exclusion. The remaining $180,000 of gain is excluded from income since it is less than the $250,000 maximum gain that may be excluded.

Example 2: T buys a principal residence on 1/1/09 for $400,000, moves out on 1/1/19 and sells the property for $600,000 on 1/1/21.

The entire $200,000 gain is excluded from income because periods after the last qualified use do not constitute nonqualified use.

Election to Accelerate Research and AMT Credits in Lieu of Bonus Depreciation
For tax years ending after March 31, 2008, corporations otherwise eligible for bonus depreciation under Sec. 168(k) may elect to claim additional refundable research and/or AMT credits instead of claiming this depreciation for “eligible qualified property” [defined in Sec. 168(k)(4)(D)] placed in service after March 31, 2008. The depreciation for qualified property is calculated for both regular tax and AMT purposes using the straight-line method rather than the method that otherwise would be used absent this new election. 

Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice that specializes in assisting practitioners in resolving their clients’ tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA’s Committee on Taxation, can be reached at (619) 469-6999 or stuartrjosephs@yahoo.com .