Tax breaks for owning real estate are undergoing another shift, thanks to the Housing and Economic Recovery Act recently signed into law by President Bush.
The main focus of the bill was on its provisions to stave off foreclosures and to bail out mortgage giants Freddie Mac and Fannie Mae. But there are also measures of interest to people with vacation homes, first-time home buyers or those planning to buy a home who haven’t owned one in three years, and homeowners who don’t itemize their federal tax returns.
Here’s a rundown:
Vacation homes
The housing bill closes a provision that some people with vacation homes had used to avoid paying tax on the appreciation realized on their vacation properties when they sell.
Under current law, taxpayers can exclude up to $250,000 per person, or $500,000 per couple, in gains on the sale of a personal residence from federal tax.
Because tax law defines a personal residence as the place where the taxpayer has lived for two of the last five years, people with vacation homes can move in for two years, sell the home and then move back to their primary residence.
But starting Jan. 1, 2009, taxpayers can exclude only the portion of the gain that corresponds to the “qualified use” of the home. That means the taxpayer will have to divide the number of years lived in the residence by the number of years it was owned to figure…
A ‘credit’ you must repay
The housing act also ushered in two new tax breaks for homeowners.
The most widely touted was one that provides a tax “credit” of $7,500 for couples and $3,750 for married couples filing separately for first-time home buyers. But the credit is really an interest-free loan, not a credit in the traditional sense of the word, Luscombe said. It must be paid back in equal installments over a 15-year period.
Saying the credit is for first-time home buyers is also a misnomer. Anyone who hasn’t owned a home for three years before purchasing the home can qualify.
One-time deduction
There are fewer strings attached to a new tax deduction for homeowners who don’t itemize deductions. The tax law gives non-itemizers a write-off to compensate them for any state and local real estate taxes they pay. The deduction is the lesser of the amount of that tax, or $500 for single filers or $1,000 for married couples.
But this deduction is available for only one year — 2008.
This deduction is aimed at helping older homeowners, who may have already paid off their mortgages and thus don’t have enough deductible expenses to itemize. It is meant to help them through today’s tough economy.
