Wednesday, August 06, 2008

Good article on the new tax provisions in the housing bill

I finally found a good article about the new tax provisions in the big housing bill that was signed last week. Although each of the provisions targets a very select audience, I thought I would try to summarize:

1) If you are a first time home buyer (did not own a primary residence for 3 years prior to this purchase) between April 9, 2008 and July 1, 2009, you can get an interest free loan of 10% on the house up to $7,500. It comes in your next years taxes as a tax credit and must be repaid starting in the second year for 15 years. You can't make more than $95,000 for singles and $170,000 for couples and the credit is reduced for those above $75,000 and $150,000.

2) If you own a home but don't itemize your deductions and therefore take the standard deduction, you can property taxes on your home above the itemized deduction of up to $1000 for couples and $500 for individuals.

Those are the "helping" provisions. To pay for this, there is a third provision which is a tax hike. Here is a quote from the article describing that tax hike:

To pay for the new breaks, Congress adopted some revenue raisers, otherwise known as tax hikes, including one that affects homeowners. At present, taxpayers who own a vacation or rental property can begin using it as their principal residence and then sell it after two years, taking advantage of the break that excludes from income capital gains from the sale of a principal residence. The excluded amount is up to $500,000 for a couple or $250,000 for a single.

But thanks to the new law, after January 1, any time a house isn't used as a principal residence it reduces the gains eligible for exclusion on a pro rata basis. So, if a couple uses a house as a vacation or rental home for five years and then as a principal residence for five years, only half their gain will qualify for the exclusion.

If the couple has a $100,000 gain, they can only exclude $50,000 of that gain from their income. But if the same couple owns a mansion and sells at a $1 million gain, they can still claim the maximum $500,000 exclusion, because it's just half of their gain.

An odd result from a law that was supposed to help struggling, ordinary homeowners.

Well, it looks like that hurts people also that maybe haven't been able to sell their home because of the bad market. For example, if they moved from a house they lived in for 4 years and established another primary residence, and didn't sell their home for 1 year after that, they would only be able to exclude 80% of their gains regardless of the fact the last year of house taxes have been dismal. That's how I read it, but I am no tax professional. I think this is going to hurt a lot of people who already were hurt by the housing market.

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