In new housing bill, tax perks for some, costs for others

The housing bill passed last weekend by Congress to help some homeowners threatened with foreclosure, as well as wounded lenders Fannie and Freddie, offers some interesting tax perks--and one pitfall--for some other folks.

•First-time homebuyers credit. Folks who purchase on or after August 9, 2008 and before July 1, 2009, get a refundable, $7,500 tax credit. The credit is 10 percent of the purchase price or $7,500, whichever is less. (Married folk who file separately have to split that credit; the IRS hasn't determined what to do with unmarried filers who purchase a home jointly). Like a lot of tax breaks, this one phases out as income increases. The phase-out starts for married folks with $150,000 in adjusted gross income and singles with $75,000 AGI. It's not available to a few populations, including non-resident aliens.

If you buy a home in 2009, you also can opt to treat the purchase has having taken place on December 21, 2008, and file an amended 2008 return to get the credit early.

The rub with this credit is that you have to start paying it back in the second year you own the home. You have 15 years to make the repayment; if you move before then, you have to pay the remainder back in full. There will be no interest due on the repaid credit.

•Deductions for non-itemizers. Homeowners who don't itemize can take up to $1,000 per married couple, $500 for singles, from their state and local property taxes as an additional standard deduction on their 2008 return. This is a nice perk for taxpayers who own their home outright or who have very small mortgage interest payments that don't merit itemizing. "This provision allows them a deduction to defray some of the costs of home ownership, but just for one year, " notes Mark Luscombe, a tax analyst with CCH, a tax information company in Riverwoods, Il.

On the other hand, some folks may end up paying more...

•Potential pitfalls for second-home owners. Folks who own second homes with the intent of using them as primary residences will no longer fully benefit from a powerful tax break for home sellers. The current law says that if you move to a second home, live there for at least 2 years and then sell it, you can exclude up from income up to $500,000 in gains (for couples filing jointly) and $250,000 for (singles and heads of household).

A new provision pro-rates the exclusion based on the amount of time you own the house as a primary, rather than secondary, home. If, for instance, you and your spouse own a vacation home for 25 years and make it your primary residence for 5 years before selling, you'll only get a portion of the exclusion: 5 years/25 years, or 20 percent. If you sell and realize a gain of, say, $300,000, you can only exclude 20 percent of that gain--$60,000--versus the full $300,000 allowable under the current law.

The new law only applies to activity after January 1, 2009, however. So if you've owned your second home for many years, the new "ratio" won't have as dire an effect on you as it would had you bought the home in 2009.

Comments

[Brian]

Unfortunate for those of us first-time home buyers who bought a house in July. Although, it's a mixed blessing because otherwise I'd owe the IRS $7500 over 15 years. :P

[Douglas]

This bill is a joke. Why should the 95-98% of people who pay their mortgage on time pay for those who purchased more than they can afford. Is there ANY PERSONAL RESPONSIBILITY LEFT IN THIS COUNTRY?

[Janet]

So what does the pay back look like and is it really worth it?