by Catherine A. Walsh, CPA, MBT

In July the Housing and Economic Recovery Act of 2008 was signed into law. This legislation included the Housing Assistance Tax Act of 2008. The following three provisions are key changes to federal tax law that may impact financial planning for individuals:

• The First-Time Homebuyer Tax Credit: allows a temporary refundable tax credit of 10% of the value of the purchase price of the home up to $7,500. The tax credit will be phased-out for individuals with Adjusted Gross Income (AGI) of $75,000 ($150,000 for joint returns). This tax credit will apply to home purchases between April 10, 2008 and June 30th 2009. The credit must be then repaid over 15 years. This tax credit is essentially an interest free loan from the federal government.
  
  
• Property Tax Deduction for Non-Itemizers: is only in effect for 2008. Taxpayers who do not itemize may increase their standard deduction by the lesser of their property tax or $500 ($1,000 for joint returns).
  
  
• The exclusion of capital gain from the sale of a principal residence: Generally under prior law, if one owned and used their home as their principal residence for two of the last five years, they could exclude the first $250,000 ($500,000 for joint returns) of capital gain when the home was sold. This was true even if during the first three years (of the five years); the home was used as a rental property. This new legislation will limit the exclusion when the home is used as a rental or vacation property before it is used as the homeowner’s principal residence. The new law requires that a taxpayer must calculate the portion of the capital gain that cannot be excluded from taxation based on a fraction the numerator of which is the time the home had nonqualified use and the denominator of which is the period the taxpayer owned the home. This provision will prevent taxpayers from reaping all of the tax favored benefits for owning a rental property and then also paying no tax on the appreciation on the property during that same period. The rule applies to home sales after December 31, 2008, and will apply to nonqualified use periods that start after that date.