Housing Act

With all of the attention on the Economic Stabilization Act, many of the “Main Street” provisions of the Housing 
Act passed in August have received less notice:

H.R. 3221, the “American Housing Rescue and Foreclosure Prevention Act of 2008”—the Housing Act—was signed into law by the President on July 30, 2008. This sweeping measure is designed to shore up the ailing housing market as well as tighten lending practices and reform financial institutions associated with that market. It also contains a number of tax changes, including tax breaks for homebuyers and homeowners, relaxed requirements for tax-exempt bonds, eased AMT rules, tax changes for businesses, as well as highly specialized changes affecting low-income housing and special investment vehicles called Real Estate Investment Trusts (REITs).

 

Good:

Property tax deduction for non-itemizers. For 2008 only, those who take the standard deduction instead of itemizing deductions may claim an additional standard deduction for State and local property taxes paid (but taxes written off as business deductions don’t count). The deduction is $1,000 for joint return and $500 for all other filers (or actual property tax paid, if that’s less).

Watch:

Reduced homesale exclusion for some sellers. After 2008, some homesellers who don’t use their properties as principal residences for their entire ownership period may wind up paying more of a tax bill than they would under current rules (or pay tax when none would be owed currently). The tax break affected is the homesale exclusion, which generally allows up to $250,000 of homesale profit to be tax-free if a home was owned and used by the seller as a principal residence (i.e., main home) for at least 2 of the 5 years before the sale. In general, the tax-free break can only be used once every 2 years. The tax-free profit amount is up to $500,000 for married taxpayers filing jointly for the year of sale if several conditions are met. A reduced maximum exclusion may apply to taxpayers who must sell their principal residence because of health or employment changes (or certain unforeseen circumstances) and as a result (1) fail the 2-out-of-5-year ownership and use rule, or (2) previously used the homesale exclusion within two years.

For sales after 2008, gain potentially eligible for the homesale exclusion will be reduced proportionately for the period of time a home wasn’t used as a principal residence. The prime example is a vacation home that is turned into a principal residence by its owners, but the new rule also can hit individuals who use a property as a main home for a while, rent it out for a period of time, and then move back in. There are, however, a number of exceptions. For starters, pre-2009 periods of non-principal-residence use don’t count, and neither do periods of temporary absence totaling no more than 2 years due to health or employment changes (or certain unforeseen circumstances), or up to 10 years of absence for qualifying members of the military or certain government employees. Finally, non-principal-residence use doesn’t count if it occurs (1) in the five years preceding the sale, but (2) after you permanently stop using the home as a main home.

Underground Economy:

Information reporting of merchants’ credit card transactions. After 2010, banks will be required to file an information return with the IRS reporting the total dollar amount of credit and debit card payments a merchant receives during the year, along with the merchant’s name, address, and taxpayer identification number (TIN). Similar reporting also will be required for third party network transactions (e.g., those facilitating online sales), with exceptions for certain small merchants. The new information reporting requirement is designed to boost the tax compliance rate of merchants.

Physics does Economics

Mark Buchanan, a theoretical physicist, is the author, most recently, of “The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You.”  He explains in the NYTimes how physicists are creating models to explain the markets.  He offers examples of three models one of which explores how a very small, such as .1%, transaction tax can actually stabilize some markets.  The tax slows down speculation, especially in foreign currency markets.

Perhaps “Numb3rs” can do a “ripped from the headlines” show.

“The Giant Pool of Money”

As reported in the Sept. 29 issue of the NY Times,  This American Life reported in May 2008 on the housing crisis.  This is their introductory text:

“A special program about the housing crisis produced in a special collaboration with NPR News.  We explain it all to you.  What does the housing crisis have to do with the turmoil on Wall Street?  Why did banks make half-million dollar loans to people without jobs or income?  And why is everyone talking so much about the 1930’s?  It all comes back to the Giant Pool of Money.”

Go listen.

Another Accounting Debacle

As if Enron’s effects on the accounting industry weren’t enough,  Financial Week reported on September 18 that Fannie Mae and Freddie Mac inflated their core capital with the use of deferred tax credits.

The article states: “When companies have losses, they are allowed to recognize tax-deferred credits in the year of the loss, even though the reduction in taxes they produce will only be realized in future years in which they have taxable income, and thus a liability they can use the credit to reduce. Fannie Mae and Freddie Mac used that method to almost double the amounts they claimed as capital reserves.”

Financial Account Statement 109 provides the methods for computing deferred tax assets and requires that firms consider whether it is more likely than not that the deferred tax asset will be not be realized.  Freddie and Fannie haven’t shown a profit in several years and little prospect of futrue profit against which to use these deferred tax assets.

Quoting Robert Willins, a tax and accounting consultant, the article continues:  “They’re not writing down the tax assets at all,” said Mr. Willens, even though “it’s almost impossible to avoid a write-down when you have a history of cumulative losses. Nevertheless, these guys have been able to avoid it with the concurrence of their auditors.” 

Fannie and Freddie counted these “assets” toward their regulatory capital and were able disguise their lack of liquidity.

 

And so it goes.

Taxpayers Get a Second Shot at the Tax Rebate

Courtesy of Kiplinger’s Retirement Report, April 2008:

If your 2007 income was too high to qualify for the tax rebates, don’t despair.  Remember, the rebate is really a prepayment of a tax credit created for 2008 returns.  If your 2008 income falls below the phase-out levels–$75,000 on a single return or $150,000 on a joint one– you’ll get your tax benefit when you file your 2008 return next spring.

Should your income exceed the threshold in 2008, and you received the rebate in 2007, not to worry.  In an unusual heads-you-win/tails-the IRS-loses setup, you won’t have to pay the money back.

I want to know if my son will pay me back the $300 that I gave him since he did not qualify to receive the rebate this year as he was still my dependent in 2007?