Small Business Taxes & Management^TM--Copyright 2008, A/N Group, Inc.

The Housing Assistance Tax Act of 2008 is part of the larger Housing and Economic Recovery Act of 2008. There are only a few provisions of interest to most taxpayers, but in order to cover the whole Act, we'll briefly discuss other provisions. Please keep in mind that this is not a complete summary of the law.

First-Time Homebuyer Credit

A taxpayer who is a first-time homebuyer 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 purchase price of a principal residence. The credit is allowed for the tax year in which the taxpayer purchases the home. The credit phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase. The provision is effective for qualifying home purchases on or after April 9, 2008 and before July 1, 2009 (without regard to whether or not there was a binding contract to purchase prior to April 9, 2008).

A first-time homebuyer is an individual who had no ownership interest in a principal residence in the United States during the 3-year period prior to the purchase of the home to which the credit applies.

No credit is allowed if the D.C. homebuyer credit is allowable for the taxable year the residence is purchased or a prior taxable year. A taxpayer is not permitted to claim the credit if the taxpayer's financing is from tax-exempt mortgage revenue bonds, if the taxpayer is a nonresident alien, or if the taxpayer disposes of the residence (or it ceases to be a principal residence) before the close of a taxable year for which a credit otherwise would be allowable.

The credit is recaptured ratably over 15 years with no interest charge beginning in the second taxable year after the taxable year in which the home is purchased. For example, if the taxpayer purchases a home in 2008, the credit is allowed on the 2008 tax return, and repayments commence with the 2010 tax return. If the taxpayer sells the home (or the home ceases to be used as the principal residence of the taxpayer or the taxpayer's spouse) prior to complete repayment of the credit, any remaining credit repayment amount is due on the tax return for the year in which the home is sold (or ceases to be used as the principal residence). However, the credit repayment amount may not exceed the amount of gain from the sale of the residence to an unrelated person. For this purpose, gain is determined by reducing the basis of the residence by the amount of the credit to the extent not previously recaptured. No amount is recaptured after the death of a taxpayer. In the case of an involuntary conversion of the home, recapture is not accelerated if a new principal residence is acquired within a two year period. In the case of a transfer of the residence to a spouse or to a former spouse incident to divorce, the transferee spouse (and not the transferor spouse) will be responsible for any future recapture.

An election is provided to treat a home purchased in the eligible period in 2009 as if purchased on December 31, 2008 for purposes of claiming the credit on the 2008 tax return and for 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

The new law increases an individual taxpayer's standard deduction for a taxable year beginning in 2008 by the lesser of (1) the amount allowable to the taxpayer as a deduction for State and local taxes described in Section 164(a)(1) (relating to real property taxes), or (2) $500 ($1,000 in the case of a married individual filing jointly). The increased standard deduction is determined by taking into account real estate taxes for which a deduction is allowable to the taxpayer under Section 164 and, in the case of a tenant-stockholder in a cooperative housing corporation, real estate taxes for which a deduction is allowable to the taxpayer under Section 216. No taxes deductible in computing adjusted gross income are taken into account in computing the increased standard deduction.

For example, Fred and Sue Flood are retired and have only $3,200 state income tax and $2,100 in real estate taxes for itemized deductions for 2008. That's significantly below the standard deduction amount. Because they file married, joint, for 2008, they can deduct $1,000 (the lesser of $1,000 or the amount of their real estate taxes) in addition to their standard deduction.

Exclusion of Gain on Sale of Principal Residence Not to Apply to Nonqualified Use

An individual taxpayer may exclude up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. To be eligible for the exclusion, the taxpayer 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.

Under the new law, gain from the sale or exchange of a principal residence 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 a fraction the numerator of which is the aggregate periods of nonqualified use during the period the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property.

A period of nonqualified use means any period (not including any period before January 1, 2009) during which the property is not used by the taxpayer or the taxpayer's spouse or former spouse as a principal residence. For purposes of determining periods of nonqualified use, (i) any period after the last date the property is used as the principal residence of the taxpayer or spouse (regardless of use during that period), and (ii) any period (not to exceed two years) that the taxpayer is temporarily absent by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances, are not taken into account. The present-law election for the uniformed services, Foreign Service and employees of the intelligence community is unchanged.

Example 1--Fred and Sue Flood buy a house for use as a vacation home on January 1, 2009 for $400,000. On January 1, 2011 they convert it to their principal residence. On January 1, 2013 they move out, selling the house on January 1, 2014 for $700,000. Fred and Sue meet the requirement of having used the house as their principal residence for 2 of the last 5 years, but they have 2 years of nonqualified use, from the purchase date of January 1, 2009 to the conversion date of January 1, 2011. Since the total holding period was 5 years and 2 of those years represent nonqualified use, 2/5 or 40% of the $300,000 gain ($120,000) does not qualify for the $250,000 ($500,000 if married filing joint) exclusion and is taxable as a long-term capital gain. The remaining $180,000 of gain is less than the maximum exclusion amount, so none of it is included in their income.

Example 2--Fred and Sue Flood buy a principal residence on January 1, 2009 for $400,000. They move out of the house on January 1, 2019 and sell the property on December 1, 2021 for $600,000. The entire $200,000 gain is excluded from gross income, as under present law, because periods after the last qualified use do not constitute nonqualified use.

On a positive note, use before January 1, 2009 does not count as nonqualified use. Thus, if you were planning using this approach to exclude gain on your vacation home, it may still work, depending on your timing.

Note that the nonqualified use period could also result from the property being used as a rental or for business.

If any gain is attributable to post-May 6, 1997, depreciation, the exclusion does not apply to that amount of gain, as under prior law, and that gain is not taken into account in determining the amount of gain allocated to nonqualified use.

Alternative Minimum Tax Treatment of Interest on Certain Bonds, Low-Income Housing Credit, Rehabilitation Credit

The new law provides that tax-exempt interest on (i) exempt facility bonds issued as part of an issue 95 percent or more of the net proceeds of which are used to provide qualified residential rental projects (as defined in Section 142(d)), (ii) qualified mortgage bonds (as defined in Section 143(a)), and (iii) qualified veterans' mortgage bonds (as defined in Section 143(b)) is not an item of tax preference for purposes of the alternative minimum tax. Also, this interest is not included in the corporate adjustment based on current earnings. The provision does not apply to interest on any refunding bond unless interest on the refunded bond (or in the case of a series of refundings, the original bond) was not an item of tax preference.

The new law treats the tentative minimum tax as being zero for purposes of determining the tax liability limitation with respect to the low-income housing credit and the rehabilitation credit. Thus, the low-income housing tax credit and the rehabilitation credit may offset the alternative minimum tax liability.

The provision applies to interest on bonds issued after the date of enactment. The provision applies to low-income housing credits determined under Section 42 attributable to buildings placed in service after December 31, 2007 (including any carryback of the credits). The provision applies to rehabilitation credits determined under Section 47 attributable to qualified rehabilitation expenses properly taken into account for periods after December 31, 2007 (including any carryback of the credits).

Require Information Reporting (1099s) on Payment Card and Third Party Payment Transactions

The new law requires any payment settlement entity (credit card issuer, bank, etc.) making payment to a participating payee in settlement of reportable payment transactions to report annually to the IRS and to the participating payee the gross amount of such reportable payment transactions, as well as the name, address, and TIN of the participating payees. A "reportable payment transaction" means any payment card transaction and any third party network transaction.

Under the provision, a "payment settlement entity" means, in the case of a payment card transaction, a merchant acquiring entity and, in the case of a third party network transaction, a third party settlement organization. A "participating payee" means, in the case of a payment card transaction, any person who accepts a payment card as payment and, in the case of a third party network transaction, any person who accepts payment from a third party settlement organization in settlement of such transaction.

The provision also requires reporting on a third party network transaction. The term "third party network transaction" means any transaction which is settled through a third party payment network. A third party payment network does not include any agreement or arrangement which provides for the issuance of payment cards as defined by the provision. In addition, a third party settlement organization is not required to report unless the aggregate value of third party network transactions for the year exceeds $20,000 and the aggregate number of such transactions exceeds 200.

The provision also imposes reporting requirements on intermediaries who receive payments from a payment settlement entity and distribute such payments to one or more participating payees.

Under the provision, reportable payment transactions subject to information reporting generally are subject to backup withholding requirements. Finally, present law penalties relating to the failure to file correct information returns would apply to the new information reporting requirements required under the provision.

The provision generally is effective for information returns for reportable payment transactions for calendar years beginning after December 31, 2010. The amendments to the backup withholding requirements apply to amounts paid after December 31, 2011.

Low-Income Housing Credit

The law increases from $2.00 per resident to $2.20 per resident the allocation authority provided annually to each State for calendar years 2008 and 2009. Also, the provision increases the minimum annual cap for certain small population States by ten percent of the otherwise available amounts in 2008 and 2009, respectively. In 2010, the volume limits will return to the levels had this provision not been enacted.

The new law provides a temporary applicable percentage of 9 percent for newly constructed non-Federally subsidized buildings placed in service after the date of enactment and before December 31, 2013.

A provision limits the definition of a Federal subsidy for these purposes to any obligation the interest on which is exempt from tax under section 103. Therefore, additional buildings may become eligible for the 70-percent credit.

The new law adds a third type of high-cost area eligible for an enhanced credit. The third type is defined as any building designated by the State housing credit agency as requiring the enhanced credit in order for such building to be financially feasible. This new type of high-cost area is not subject to the present-law limitation limiting high cost areas to 20 percent of the population of each metropolitan statistical area or nonmetropolitan statistical area.

Rehabilitation expenditures paid or incurred by a taxpayer with respect to a low-income building are treated as a separate building and may be eligible for the 70-percent credit if they satisfy the otherwise applicable credit rules.The provision increases the minimum expenditure requirements. Under the new law, the rehabilitation expenditures must equal the greater of an amount that is (1) at least 20 percent of the adjusted basis of the building being rehabbed; or (2) at least $6,000 per low-income unit in the building being rehabbed. The provision also indexes the $6,000 amount for inflation. The other present-law rules apply. The provision retains the taxpayer election allowing the 30-percent credit to both existing building and the rehabilitation expenditures if the second prong (i.e., at least $6,000 of rehabilitation expenditures per low-income unit) of the rehabilitation expenditures test is satisfied.

The new law expands the size of the community service facility with respect to which the low-income housing credit may be claimed. Under the provision the size of the community service facility may not exceed the sum of: (1) 25 percent of so much of the eligible basis of the qualified low-income housing credit project of which it is a part as does not exceed $15,000,000; and (2) 10 percent of any excess over $15,000,000 of the eligible basis of the qualified low-income housing credit project of which it is a part.

A provision clarifies the basis reduction rule to apply to Federally-funded grants received before the compliance period. It also provides that no basis reduction is required for Federally-funded grants to enable the property to be rented to low-income tenants received during the compliance period if those grants do not otherwise increase the taxpayer's eligible basis in the building.

The new law replaces the first two exceptions to the ten-year rule (for existing buildings) under present law with one new exception. The new exception waives the ten-year rule in the case of any Federally- or State-assisted building. For these purposes, the definition of Federally-assisted building is expanded to include any building which is substantially assisted, financed, or operated under section 8 of the United States Housing Act of 1937, section 221(d)(3), 221(d)(4) or 236 of the National Housing Act, section 515 of the Housing Act of 1949, or any other housing program administered by the Department of Housing and Urban Development or the Rural Housing Service of the Department of Agriculture. The term State-assisted building means any building which is substantially assisted, financed, or operated under any State law similar in purposes to those of the Federal laws used in the definition of a Federally-assisted building.

In general, the allocation of the low-income housing credit must be made not later than the close of the calendar year in which the building is placed in service. The new law modifies the first prong of the carryover allocation rule. Under this modification such an allocation will satisfy the first prong provided that more than 10 percent of the taxpayer's reasonably expected basis in the project (as of the close of the second calendar year following the calendar year of the allocation) is incurred as of 12 months after the allocation is made. The second prong of the carryover allocation rules is unchanged.

The new law eliminates the bond posting requirement. In its place the provision extends the otherwise applicable statute of limitation until three years after the Secretary of the Treasury is notified of noncompliance with the low-income housing credit rules. Also, at the election of the taxpayer, the provision applies with respect to dispositions of interests in a building on or before the date of enactment if it is reasonably expected that such building will continue to be a qualified low-income building for the remaining compliance period.

The provision adds two additional criteria which States must use in its allocation of credits among potential low-income housing projects. The additional criteria are: (1) the energy efficiency of the project; (2) the historic nature of the project (e.g., encouraging rehabilitation of certified historic structures (sec. 47(c)(3))).

A provision adds a third exception to the general rule that student housing is not eligible for the low-income housing credit. This new exception applies in the case of a student who was previously under the care and placement responsibility of a foster care program (under part B or E of title IV of the Social Security Act).

The new law clarifies that a project which otherwise meets the general public use requirements above shall not fail to meet the general public use requirement solely because of occupancy restrictions or preferences that favor tenants: (1) with special needs; or (2) who are members of specified group under a Federal program or State program or policy that supports housing for such a specified group; or (3) who are involved in artistic and literary activities.

In the case of a low-income building which is tax-exempt bond financed and eligible for the low-income housing credit, the provision provides that both the bond and credit restrictions will be satisfied if the next available unit in the building is rented to a new tenant who satisfies the income and rent-restriction requirements. It therefore conforms the tax-exempt bond rule to the low-income housing credit rule.

A provision waives the annual recertification requirements under the low-income credit (Sec. 42) and tax-exempt bonds (Sec. 142) for any project as long as no residential unit in the project is occupied by tenants who fail to satisfy the otherwise applicable income limits. The provision does not modify the HUD rules; therefore some projects must continue annual certification notwithstanding this provision.

Special Rule for Mortgage Revenue Bonds in Presidentially Declared Disaster Areas

The definition of a qualified private activity bond includes a qualified mortgage bond (Sec. 143). Qualified mortgage bonds are issued to make mortgage loans to qualified mortgagors for the purchase, improvement, or rehabilitation of owner-occupied residences. The Code imposes several limitations on qualified mortgage bonds, including income limitations for homebuyers and purchase price limitations for the home financed with bond proceeds.

The new law waives the first-time homebuyer requirement for residences located in Presidentially declared disaster areas. In addition, residences located in such areas are treated as targeted area residences for purposes of the income and purchase price limitations. The provision applies to bonds issued after May 1, 2008 and before January 1, 2010.

Election to Accelerate AMT and Research Credits in Lieu of Bonus Depreciation

Taxpayers are permitted an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property generally placed in service in 2008. Under the new law, corporations otherwise eligible for additional first year depreciation may elect to claim additional research or minimum tax credits in lieu of claiming depreciation under Section 168(k) for "eligible qualified property" placed in service after March 31, 2008. A corporation making the election forgoes the depreciation deductions allowable under Section 168(k) and instead increases the limitation under Section 38(c) on the use of research credits or Section 53(c) on the use of minimum tax credits. The increases in the allowable credits are treated as refundable for purposes of this provision. The depreciation for qualified property is calculated for both regular tax and AMT purposes using the straight-line method in place of the method that would otherwise be used absent the election under this provision. The research credit or minimum tax credit limitation is increased by an amount equal to 20 percent of the bonus depreciation amount for certain eligible qualified property that would be claimed absent an election under this provision.

Bonds Guaranteed by Federal Home Loan Banks Eligible for Tax-Exempt Treatment

Interest paid on bonds issued by State and local governments generally is excluded from gross income for Federal income tax purposes. However, the exclusion generally does not apply to State and local bonds that are Federally guaranteed. Under the provision, bonds issued by State and local governments are not treated as Federally guaranteed by reason of any guarantee provided by any Federal Home Loan Bank of a bond issued after the date of enactment and before January 1, 2011, if such bank made a guarantee of such bond in connection with such issuance. The provision applies to guarantees made after the date of enactment.

Rehabilitation Credit Tax-Exempt Use Safe Harbor and Definition of Disqualified Lease

A 10-percent credit is provided for rehabilitation expenditures with respect to buildings first placed in service before 1936. A 20-percent credit is provided for rehabilitation expenditures with respect to a certified historic structure. Rehabilitation expenditures eligible for the credit do not include any expenditure in connection with the rehabilitation of a building that is allocable to the portion of the property that is (or may reasonably be expected to be) tax-exempt use property. In the case of nonresidential real property, tax-exempt use property generally means the portion of the property leased in a disqualified lease to tax-exempt entities. For this purpose, a tax-exempt entity means (1) the United States, a State or political subdivision, a U.S. possession, or an agency or instrumentality thereof, (2) a tax-exempt organization, (3) a foreign person or entity, or (4) an Indian tribal government.

A safe harbor provides, however, that in the case of nonresidential real property, the property is treated as tax-exempt use property only if the portion of the property leased to tax-exempt entities in disqualified leases is more than 35 percent of the property. A disqualified lease for this purpose is a lease to a tax-exempt entity in specified circumstances. These are: (1) part or all of the property was financed, directly or indirectly, by tax-exempt bond financing and the entity (or a related entity) participated in the financing; (2) under the lease there is a fixed or determinable price purchase or sale involving the entity or a related entity (or the equivalent of such an option); (3) the term of the lease exceeds 20 years; or (4) there has been a sale and leaseback of the property and the entity (or a related entity) used the property before the sale, transfer, or lease.

The new law increases from 35 percent to 50 percent the percentage of the property that may be leased to a tax-exempt entity in a disqualified lease without requiring allocation of rehabilitation expenditures under the rehabilitation credit. Under the provision, for determining rehabilitation expenditures eligible for the credit, nonresidential real property is treated as "tax-exempt use" property only if the portion of the property leased to tax-exempt entities in disqualified leases is more than 50 percent of the property. The provision is effective for expenditures properly taken into account for periods after December 31, 2007.

Certain GO Zone Incentives

The new law makes three changes to the law with respect to Gulf Opportunity Zone incentives. First, the new allows a taxpayer who claimed a casualty loss to a principal residence (within the meaning of Section 121) resulting from Hurricane Katrina, Hurricane Rita, or Hurricane Wilma and in a subsequent year receives a grant as reimbursement of such loss to elect to file an amended return for the taxable year to which such deduction was allowed. The casualty loss deduction is reduced, but not below zero, by the amount of such reimbursement. The time for filing such amended return is the later of three years after the original due date for filing the tax return or four months after the date of enactment of this Act. Any underpayment of tax shall be subject to one year of interest, but no penalty or additional interest if paid not later than one year after the filing of the amended return.

Second, the new law removes the commencement date of January 1, 2008, for self-constructed Gulf Opportunity Zone extension property. The placed in service date of December 31, 2010 and the progress expenditure date of January 1, 2010 are not modified.

Third, for purposes of GO Zone bonds only, the provision includes the following counties for purposes of defining the GO Zone: Colbert County, Alabama and Dallas County, Alabama.

Other Provisions

There are a number of other provisions of less general interest in the new law. They include:

• Modification of rules pertaining to FIRPTA nonforeign affidavits (foreign persons owning U.S. real property interests);
  
• Reforms related to real estate investment trusts (REITs);
  
• Delay implementation of worldwide interest allocation; and
  
• Modifications to corporate estimated tax payments.

--Last Update 08/07/08