The Housing and Economic Recovery Act of 2008 is designed primarily to bolster the mortgage industry by helping troubled borrowers and their lenders. It also provides incentives and tax breaks for certain homebuyers and homeowners. The Act contains two significant home-related tax breaks.

1. Refundable Credit for First-time Home Buyers

• A major change is the refundable credit for first-time home buyers of up to $7,500. The credit is equal to the lesser of $7,500 or 10% of the purchase price of the home, which must be purchased from an unrelated person between April 8, 2008, and July 1, 2009, and be the principal residence of the taxpayer. (The credit is phased out for taxpayers with adjusted gross income between $75,000 and $95,000 for individual taxpayers, and $150,000 and $170,000 for married joint filers.) To qualify as a first-time home buyer, the taxpayer must not have an ownership interest in a principal residence during the three years preceding the purchase. The taxpayer can elect to claim the credit for a home purchased between January 1, 2009, and July 1, 2009, on his or her 2008 return or hold it for the 2009 return.
  
  
• The refundable credit is actually an interest-free loan -- it has to be repaid! The act requires that the taxpayer begin repaying the credit with additions to net income taxes equally over a 15-year period, beginning in the second year following the purchase of the home. Repayment is accelerated if the home is either sold or ceases to be the taxpayer’s principal residence. Involuntary conversion does not accelerate recapture if a replacement principal residence is purchased within two years, and there is no further recapture after the taxpayer’s death.
  
  

2. Additional Standard Deduction

• Additional provisions of the bill include an additional standard deduction for those individuals who do not itemize on their personal tax returns. The deduction, which is added to the taxpayer’s standard deduction, is the lesser of their otherwise deductible property taxes paid or $500 ($1,000 for a joint return).
  
  
  

Converting Second Homes or Rental Properties to Principal Residences
The Housing Act also includes a few revenue-raising provisions. Taxpayers who convert second homes or rental properties to principal residences will now have to allocate any gains realized on the sale between the periods of use as not a principal residence and as a principal residence before the exclusion of gain on the sale of a principal residence is applied. In effect, the sale of such a residence could result in both taxable (as capital gains) and exempt gains. Periods of use “not as a principal residence” will not include any period preceding January 1, 2009.

Find out Exactly How You're Affected
Determining exactly how the Housing and Economic Recovery Act will affect your tax liability – and what you should do to take full advantage of the act – can be tricky. Please contact your local Yeo & Yeo tax professional if you have any questions about this or other tax laws, or to talk about strategies you might implement to minimize your taxes for 2008 and beyond.