August 04, 2008
Congress has passed and the president is expected to sign a housing relief bill with over $15 billion in tax incentives and several important revenue offsets. The bill's tax provisions are aimed at both businesses and individuals, and will have a significant impact on a large number of taxpayers. The changes will affect real estate investment trusts, provide incentives for first-time homebuyers, change tax rules for housing bonds and credits, allow some taxpayers to accelerate AMT and R&D credits and, beginning in 2010, impose new payment card reporting requirements. A detailed description of the bill's tax provisions follows.
Individual tax provisions
The bill creates a temporary refundable tax credit for first-time homebuyers of 10 percent of the purchase price of a principal residence up to $7,500 to be paid back in the same manner as an interest free loan.
Any taxpayer who has not had ownership in a principal residence within three years of a home purchase will qualify for the credit, but the property cannot be purchased from a related person. The credit is available for property bought on or after April 9, 2008, and before July 1, 2009. If the home is purchased in 2009 before July 1, the credit can still be applied to 2008 taxes at the election of the taxpayer.
The credit must be paid back over the next 15 years in equal installments, beginning with the second year following the year of purchase. The credit phases out for taxpayers with adjusted gross income over $75,000 ($150,000 for joint returns). If the property is sold before the credit has been paid back, the remaining balance will be due in the tax year the property is sold, unless the property is sold at a loss.
Property tax deduction
The bill will temporarily allow property owners who do not itemize their deductions to claim a standard property deduction of up to $500 for individuals and $1,000 for joint filers. The deduction is available only in taxable years beginning in 2008. Earlier versions of this provision had barred the deduction for taxpayers in local jurisdictions that raised property tax rates in 2008, but no such limitation was included in the final bill.
Tax provisions affecting businesses
Election to accelerate R&D and AMT credits
The legislation provides businesses an election to cash out some of their older AMT and research credit carryovers in lieu of claiming bonus depreciation on property placed in service during the last nine months of 2008. The amount that can be cashed out through a refundable credit is equal to the lesser of:
- 20 percent of the additional depreciation that would result from applying the bonus depreciation rules to otherwise bonus-eligible property acquired (or costs incurred in the case of self-constructed property) during the last nine months of 2008;
- 6 percent of the taxpayer's accumulated minimum tax and research credit carryovers that are attributable to taxable years beginning before 2006 or
- $30 million.
The election is available for the taxpayer's first taxable year that ends after March 31, 2008. Taxpayers making the election must use the straight line method with respect to property that would otherwise be eligible for bonus depreciation.
The provision is intended to provide a stimulus benefit to some of the companies that were unable to benefit from the bonus depreciation rules. Because the additional deductions from bonus depreciation could replace the use of credits without actually reducing tax liability, bonus depreciation provided no incentive for such taxpayers to increase their investment. Allowing a portion of the taxpayer's older credits to be cashed out, with the amount of the benefit at least partially tied to what would otherwise be the tax benefit of the bonus depreciation, should restore the stimulative benefit to those taxpayers.
Many of the restrictions and rules governing Real Estate Investment Trusts will be eased by the bill. REITs are provided special consideration under the tax code, but correspondingly have strict limitations on their activities and composition. One of the strictest rules applies a 100 percent tax on income from prohibited transactions called dealer sales. Many REITs operate under a dealer sales safe harbor that will be expanded greatly by the bill. The minimum holding period for properties under the safe harbor will be cut in half from four to two years, and REITs will be allowed to use aggregate fair market value of all assets for calculating the 10 percent limit on sales that can qualify for the safe harbor.
General REIT restrictions will also be expanded. REITs are allowed to use separate taxpaying subsidiaries to house many of the activities not allowed in a REIT. The percentage of REIT assets that can be held in securities of a taxable REIT subsidiary will increase from 20 to 25 percent under the bill, and the REIT hotel subsidiary exception will be expanded to include health care facilities. The Secretary of Treasury will also be given authority to designate new types of income allowable for purposes of the 95 percent and 75 percent income tests, and numerous provisions have been made to accommodate foreign currency gains.
The bill contains several provisions expanding and extending incentives created in 2005 to spur the redevelopment after the hurricanes that hit the Gulf region. Two of these provisions will provide tax relief for taxpayer who received a casualty loss grant and claimed a casualty loss deduction, and extend the deadline for Go Zone construction property eligible for bonus depreciation.
Housing bonds and tax credits
The bill will modify many of the rules for tax-exempt bonds, the low-income housing credit and the rehabilitation credit. An additional $11 billion in tax-exempt bonds will be provided in 2008 for loans to first-time homebuyers and the construction of low-income rental housing. The bill will also remove AMT limitations for tax-exempt housing bonds and allow the low-income housing credit and rehabilitation credit to be used to offset the AMT. Other key provisions would do the following:
- Temporarily make bonds guaranteed by federal home loan banks eligible for treatment as tax-exempt bonds regardless of whether the bonds are used to finance housing programs;
- Temporarily increase the state-by-state annual limit on federal low-income housing tax credits and
- Update the tax-exempt housing bond rules to conform certain aspects of these rules to the low-income housing tax credit rules.
Payment card reporting
The legislation will require institutions that make payments to merchants in settlement of credit and debit cards, as well as third-party payment networks such as PayPal, to report the gross amount of settlements they pay to, or for the benefit of, merchants and other recipients beginning in 2011. Treasury is authorized to establish the rules under which the information returns will be filed.
In the case of third-party payment networks, reporting would only be required on payees who receive at least $20,000 in income from the transactions each year or participate in at least 200 transactions in a year. However, there is not a similar de minimis rule in the case of credit and debit cards. Reporting is required with respect to all payees, including individuals, corporations and partnerships.
The new reporting requirements will apply for settlements occurring in calendar year 2011. Back-up withholding for those who do not provide a valid taxpayer identification number will be required beginning in 2012.
Exclusion of gain on sale of a principal residence
The exclusion from income of the gain from the sale or exchange of a principal residence will be limited under the legislation to the period that a home is actually used as a principal residence. Under current law, all gain on a home up to $250,000 for an individual or $500,000 for a married couple is generally excluded if the home is used as principal residence for two of the five years preceding the sale. Under the bill, the amount of gain excluded from income will be prorated to eliminate the portion of time after 2008 it is not used as principal residence, defined as nonqualified use. For example, if a taxpayer used a property as a vacation home from 2004 through 2011 and a principal residence from 2012 through 2013, the taxpayer would be required to include three-tenths' of the gain in taxable income, representing the portion of time the property was not a principal residence after 2008.
However, when a taxpayer otherwise qualifies for an exclusion of gain by using the property as a principal residence for two of the five years preceding the sale, all time in that five-year period after the date the home is last used as a principal residence will not be considered nonqualified use under the new rules. Thus, if a taxpayer uses a property as principal residence from 2009 through 2010, and then as vacation home from 2011 to 2013, the gain during all five years of ownership can still be excluded from income.
Worldwide interest allocation
The implementation of a new liberalized rule allowing the allocation of interest expense on a worldwide basis will be delayed by two years. The new rule was scheduled to become effective for tax years beginning after 2008, but now will not be effective until tax years beginning after 2010. It is questionable whether the new interest allocation rule will ever become effective. Democratic lawmakers have proposed delaying its implementation for eight additional years to pay for another pending tax bill.