As the fine details about the $300 Billion Dollar Housing Bill become available, I’ll share them here. Overall, the plan should benefit the housing market and the economy in general.
Unwrapped, Housing Tax ‘Credit’ is Really a Loan — Washington Post
Washington Post, By Michelle Singletary
July 31, 2008
There’s been a lot of discussion about how much the new housing bill passed by Congress will help individuals facing foreclosure.
Some will be able to keep their homes, to be sure. But there’s a different provision of the Housing and Economic Recovery Act that I want to focus on — the much-trumpeted tax credit for first-time homebuyers.
A tax credit is much more valuable than a deduction. A credit reduces dollar for dollar the amount of tax you owe. A deduction merely reduces the amount of your income that is taxable.
Under the new law, certain homeowners will be eligible for a tax credit equal to 10 percent of the purchase price of a home, up to a maximum of $7,500. The credit is $3,750 for married couples filing separately. Unmarried people who jointly purchase a home will be able to divide the $7,500 credit.
When I saw the $7,500 amount, I thought, not a bad tax credit. But there are all kinds of catches.
Before you rush to take advantage of this, be aware it’s a loan cloaked as a credit.
“Essentially this is a loan administered through the tax code,” said Gerald Prante, an economist with the nonprofit Tax Foundation. “I question whether the tax code is the best way to do this.”
Financially, the loan has about the best rate and term you can get. It’s interest-free. Homebuyers would be required to repay the government over 15 years in equal installments for any amount received.
So let’s say you qualify for the maximum credit of $7,500. Considering the price of housing, just about every first-time buyer would qualify. The terms would mean a yearly loan payment of $500 for 15 years, or about $41.67 a month.
You have to begin repaying the credit in the second tax year after you purchase the home. If you sell the house before you pay off the credit, the entire amount becomes immediately due.
However, if you sell and the gain is less than the credit, then you only have to repay up to the amount of the gain. If the homeowner dies before the credit/loan is repaid, any outstanding amount is forgiven.
The new law defines a first-time homeowner as an individual who has had no ownership interest in a principal residence for a three-year period ending on the date of the current home purchase.
Also, there’s a small window to this opportunity. The credit applies only to homes purchased on or after April 9, 2008, and before July 1, 2009.
Another catch: High-income homebuyers won’t qualify for the credit. You can claim less of the credit amount the more you earn. The phaseout starts for single filers with adjusted income of more than $75,000 and $150,000 for joint filers. It completely phases out at $95,000 for singles; $170,000 for married couples filing jointly.
The credit is also not available to nonresident aliens or those who qualify for a similar tax credit in the District of Columbia. And you can’t take this credit if your home is financed by the proceeds of a qualified tax-exempt mortgage bond.
There is one other tax-friendly provision. The bill would provide homeowners who claim the standard deduction with an additional standard deduction for state and local real property taxes.
The maximum amount that may be claimed under this provision is $500 ($1,000 for joint filers), according to a summary provided by the Senate Finance Committee.
This particular provision will be helpful to taxpayers who don’t itemize. For example, a family with taxable income of $65,100 to $131,450 could deduct $1,000 of property taxes and pay up to $250 less in federal taxes, according to Nebraska Sen. Ben Nelson (D), who issued a release praising the deduction.
Previously, only taxpayers who itemize were able to take advantage of the property tax deduction. About 35 percent of tax returns include itemized deductions, according to Prante.
Ah, but there’s a catch to this deduction, too. It applies only for the 2008 tax year.
Nonetheless, at least for one year, the property tax deduction will help people who are close to paying off their mortgages and thus don’t have a lot of mortgage interest to deduct. It will also help low- to moderate-income homeowners and people in areas with no or low state taxes but who have high property taxes, Prante said.
Weighing these two tax provisions of the new law, I believe the state and property tax deduction will be the most helpful even though it is available just for one year.
I’m not crazy about the tax credit. This loan masked as a credit increases a homebuyer’s debt.
Yes, it will let some people reduce their tax burden, but the benefit is only temporary.
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Additional Deduction If you are a homeowner who takes the standard deduction on your federal income taxes and does not itemize, this one is for you. You can now take an additional federal tax deduction of $500, or $1,000 if you are married and filing your tax returns jointly. Again, this one is gravy; you get it in addition to the standard deduction.
Since itemizers are often people who pay a lot of mortgage interest, this deduction will generally benefit people who pay little or none, like those who have paid off their mortgages entirely or close to it. There is one hitch here: you will need to report the property taxes you paid on your tax form. If they are less than $500 (or $1,000 if you are married and filing a joint return), your deduction will be limited to the amount of the property tax you paid.
Reverse Mortgage Changes Reverse mortgages allow older Americans, generally 62 and older, to get a lump sum or a monthly check that comes out of their home equity. They do not have to pay the money back until they stop living there permanently or their heirs sell the house.
The problem with these loans, however, is that they often come with high fees. Moreover, some salespeople pressure borrowers who are applying for the loan to purchase annuities, long-term care insurance or other financial products that are not necessarily in the borrower’s best interest.
The bill tries to address both issues. First, it limits origination fees on reverse mortgages at 2 percent of any loan up to $200,000 and 1 percent beyond that, up to a maximum of $6,000.
The bill also states explicitly that borrowers cannot be forced to purchase an annuity or other financial or insurance product as a condition of qualifying for a reverse mortgage.
Finally, the bill raises the maximum amount that people can borrow. Before, the limits were set on a county by county basis, according to AARP’s legislative policy director, David Certner. The biggest allowable mortgage available anywhere was just over $400,000. Now, there is a nationwide cap of $625,500.
Redefinition of Jumbo Loans Often, if you want the mortgage loan with the lowest possible interest rate, it has to be small enough to be purchased by Fannie Mae or Freddie Mac from whatever bank or other institution originated it.
Under the new bill, Fannie and Freddie have permanent authority to buy bigger loans in areas with high housing costs. (Temporary measures allow them to buy bigger loans, but those expire on Dec. 31.) They can buy loans up to 115 percent of the local median home price, though they cannot buy any loans larger than $625,500. Any larger loan will generally be a jumbo loan, which will cost more in interest.
A Break for Veterans Lenders will have to wait nine months, instead of 90 days, before beginning foreclosure proceedings on homes owned by someone returning from the military.
Lenders must also wait a year before raising interest rates on a mortgage held by someone returning from military service.
These provisions expire on Dec. 31, 2010.
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