Housing Tax Bill now law; extenders, second stimulus package and more under consideration

Congress suddenly is passing tax legislation. Feeling both the pressure of the economic downturn and a legislative timetable cut short this year by the presidential election, a logjam of tax legislation is beginning to break in dramatic fashion. A $15.1 billion tax bailout of homeowners and the housing industry was quickly passed on July 25 before the August recess after being held up in negotiations for months. Shortly thereafter, on July 30, President Bush signed the bill, regarded as one of the most significant pieces of housing legislation in decades. Now, an extenders package, temporary alternative minimum tax (AMT) relief, a possible second economic stimulus bill, and more are all on a fast track.

Housing Assistance Tax Act

The Housing and Economic Recovery Act of 2008 is now law, having finally been passed by Congress after months of debate. This massive piece of legislation addresses the housing and mortgage crisis and includes a tax title, the Housing Assistance Tax Act of 2008. The tax title provides a variety of relief provisions for homeowners, homebuyers and investors. To pay for this tax relief, the new law's tax title also takes aim at retail businesses, vacation and rental property conversions, and international and large corporations.

Included in the tax title of the legislation are the following $15.1 billion in relief provisions:

• An additional standard deduction of up to $500 for property taxes for homeowners who do not itemize;
• A maximum $7,500 tax credit for first-time homebuyers, subject to income limits and a 15-year pay-back requirement;
• An increase in funding for tax-free mortgage revenue bonds to allow local jurisdictions the financing to provide mortgage relief;
• Additional incentives to invest in low-income housing, including enhancement of the low-income housing tax credit and repeal of the AMT limitations on tax-exempt housing bonds, the low-income housing credit and the rehabilitation credit;
• Real estate investment trust (REIT) modernization rules that will help bring further investment in the real estate markets;
• GO Zone incentives for real estate investment in certain disaster areas; and
• A provision for AMT and research and development (R&D) credit monetization.

Also included in the Housing Assistance Tax Act, however, are over $15.1 billion in "offset" provisions that are designed to bring in the tax revenue necessary to pay for the tax relief provisions. Congress enacted four major revenue raising measures to do the job:

• Mandatory credit card reporting. Credit (and debit) card providers will be required to report to the IRS the debit and credit card sales that it processes for each merchant. Congress figures that there are more than $9 billion in taxes that will be collected as the result of this anti-underreporting measure. To allow credit card providers, merchants and the IRS to prepare for this major change, the provision will only apply to sales after 2010. Small merchant and other exceptions apply.
• Vacation/rental property gain. The exclusion of up to the first $250,000 of gain realized ($500,000 for joint filers) on the sale of a principal residence makes homeownership a powerful tax shelter. A loophole was being used by vacation home and rental property owners through which they moved into the property and lived in it as their principal residence for at least two years prior to selling it and claiming the $250,000 (or $500,000 gain exclusion). The new law closes this loophole for all gain attributable to periods after 2008 during which the residence was not the owner's principal residence.
• Worldwide interest allocation. The American Jobs Creation Act of 2004 allowed an affiliated group of corporations to elect global interest expense allocation starting in 2009. The new law delays the worldwide interest allocation rules in the 2004 Jobs Act until tax years beginning after December 31, 2010, a postponement that will bring in $7.6 billion.
• Corporate estimated tax payments. Like other recent tax bills, the new law accelerates estimated tax payments for some super-large corporations (with at least $1 billion in assets). Payments by those corporations due in July, August and September 2013 are increased by 16.75 percent.

"Extenders" bill

The House has already passed legislation (H.R. 6049) renewing a large number of temporary but expired tax breaks (so-called "extender provisions"). Among them are the higher education tuition deduction, the state and local sales tax deduction, tax breaks for employers, and some energy and charitable giving incentives. However, the extenders bill has stalled in the Senate over objections on how to pay for these and other tax incentives, especially an "AMT patch" for 2008.

PPA technical corrections bill

The House has approved the Pension Protection Technical Corrections Bill (H.R. 6382), which would make a number of technical and substantive changes to the Pension Protection Act of 2006 (PPA). The House had previously passed a different version of a PPA technical corrections bill without an asset smoothing provision. The Senate version includes an asset smoothing provision.

Second stimulus package

Democrats in Congress are reportedly working on a second economic stimulus package, which could include another round of tax rebates. Other likely provisions for a second stimulus package would be increased funds for infrastructure spending and an extension of unemployment benefits. The second stimulus package is expected to reach the House or Senate floor in September.

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