Tax Info Blog

Tax Provisions of New Housing Law

The President just signed H.R. 3221, the "American Housing Rescue and Foreclosure Prevention Act."  While mostly a bill having to do with regulation of housing, there are some tax provisions:

1. Expands and changes rules related to mortgage bonds and the low income housing credit, including how these relate to the AMT
2. Creates a first-time homebuyer credit of 10% of purchase price up to $7500 (half that MFS) which phases out between $75,000-$95,000 MAGI ($150,000-$170,000 MFJ).  "First-time" means not owning a home for three years before the purchase date.  Must be a principal residence.  The credit is recaptured over 15 years, unless the home is sold or no longer is the principal residence (in which case the credit is 100% due that year).  Credit applies for homes purchased between April 8, 2008 and July 1, 2009
3. Creates a new "standard deduction" for real property taxes for those taxpayers who take the standard deduction.  The limit is $500 ($1000 MFJ) and applies to 2008 only

To "pay for" these measures, there are two main tax increases:

1. Requires "payment settlement entities" (think Paypal) to report transactions to the IRS
2. Prohibits taxpayers selling a home in 2009 or later from excluding any gain attributable to the period in which the home was "non-qualifed" (mainly, a rental property or a vacation home).  The non-excluded portion would face capital gains taxation.  The excluded portion would face the same $250,000 ($500,000 MFJ) exclusion rules that exist currently (not used in 2 years, 24 of the prior 60 months as principal residence, etc.)  The non-excluded gain is equal to the gain times the percent of the time that the home was not a principal residence

Home Sales When Two People on Title

Q: I have a home I bought from my mom. It is worth $160,000. I still owe her $65,000. She is on the deed because she refuses to take a risk taking her name off. I want to sell and have been in my home over 2 years. I don't want to pay tax on the income. Because she is on the deed can I still take the tax free income for living here 2 years?
Deborah

A: Since you're each on title, you would each be entitled to a portion (presumably half) of the sale proceeds.  The $250,000 excludable amount applies to each of you.  The 24 out of 60 test for primary residence and ownership apply to each of your halves.  The pro-ration allowance would apply separately to each of your halves. 

If all of that is Greek to you, first read my post on home sales.

How to Figure the Foreign Earned Income Exclusion

Q: Can you walk me through the new formula for figuring the foreign earned income exclusion?
Katherine

A: Everyone first needs to read my post on the Foreign Earned Income Exclusion.

First, add together the current exclusion amount to the housing exclusion amount for the country you are in.  For most people, this should be a little over $100,000, so let's say this is what it is for you.

Then, assuming you have passed either the physical presence test (330 out of any 365 days) or the bona fide residence test, count how many days in the calendar year qualify as "exclusion days."  Let's say this is 150 for you.

Then, divide your exclusion days (150) by the number of days in the calendar year (let's ignore the leap year here and say 365 for this example).  You'd arrive at .41095.  Multiply this by your maximum exclusion amount ($100,000), and you get $41,095.  This is the most you can exclude in foreign income for this year.

Thanks to the new rules, any income earned above this income is taxed in the income tax bracket it would fall in if none of the income could be excluded.  This makes the exclusion far less lucrative than it used to be.  There's always the foreign tax credit, which has a totally different set of rules.

Bottom line--don't do this without software unless you like numbers...a lot.

How to Deal with Deferred Mortgage Interest

Q: I just sold a home in which interest payments were deferred until the note was paid off.  This just happened with the sale.  How do I account for the mortgage interest?
Josh

A: Since you are a cash-basis taxpayer, it sounds to me like you'd be able to take the full deduction for interest paid this year.  Assuming this was a primary residence, it would be deductible as an itemized deduction subject to the usual limits.  If it's a rental property, it would be deductible that way.

There's also an election you can make to "capitalize" the interest (which would increase your basis in the sale).  This probably doesn't make a lot of sense given the interplay of the home sale exclusion rules, the lower tax rate on long-term capital gains, and the fact that the mortgage interest deduction is against ordinary income.  But, it's an option that's available to you.