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housing credit

Housing Credit Extended – What Else Is New?

November 5, 2009 · 7 comments

If you’re opposed to extending the first time homebuyer’s credit (I am), you’re probably in the minority. And you’re definitely not in the Senate. The Senate voted unanimously to approve the bill and the House is expected to follow suit (at least the approval bit).

Under the new law, the first time homebuyer’s credit would be extended to April 30, 2010 to sign a contract to buy a home and another sixty days to close. *Whew, just in time for the November elections.*

The bill also extends the credit to homeowners who have lived in their current home for five of the last eight years – those folks get a reduced credit of $6,500 for homes purchased after November 30, 2009 (but before the April deadline).

Additionally, income caps were raised to $125,000 a year for individuals and $225,000 a year for married couples.

Raising the income caps? The only sensible part of the plan.

The new law will cost taxpayers about a billion dollars a month. Yes, a billion.

According to a recent report released by Goldman Sachs economist Alec Phillips, all but about 200,000 of the 1.4 million first-time buyers who claimed the first time homebuyer’s credit in 2009 would have purchased a home even without the incentive. The cost to taxpayers? $8.5 billion. If you do the math, that means that the real “cost” to taxpayers for increasing home sales is about $42,500 per home. Let that sink in for a minute.

Goldman Sachs also estimates that all of that money only resulted in boosting prices by 5% – and that includes the idea that sellers increased their prices in anticipation of the credit, something that I was concerned about (you may recall that I wasn’t a fan of the bill in the first place).

I don’t think anyone will argue that the bill did nothing. It clearly did something – at least 200,000 felt compelled to buy under the plan. But I am concerned about the cost. I don’t think we can fix everything by throwing more money at it (except maybe baseball but that just makes me sound like a bitter Phillies’ fan). I guess I’m oddly more laissez-faire than Congress (who’d have thunk it?) but *gasp* what about the notion of letting the housing market right itself? We’ve had two years of housing credits (yes, there was a stimulus credit in 2008) and now we’re pushing off to 2010. When does it end?

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Hey Kid, Wanna Buy a House?

October 23, 2009 · 7 comments

Information involving potential fraud with respect to the first time homebuyer’s credit continues to make headlines. After initial reports that over 100,000 refunds were perhaps inappropriately distributed, the IRS has released more data about fraud relating to the credit.

Officials from the Internal Revenue Service testified before Congress that as much as $600 million of taxpayer credits are “suspicious.” Of those, the IRS suspects that 73,799 claims totaling almost $504 million appear to have been distributed to individuals who would not qualify as first time homebuyers. And – wait for this one – 582 taxpayers under the age of 18 years old, including several 4 year olds, applied for and received the credit. The legislation does allow for minors to apply for the credit but as young as 4? That seems to indicate some kind of attempt at income shifting or other manipulation from parents who were ineligible for the credit.

And it gets worse. More than 19,000 taxpayers have been identified as making application for the credit for properties that were not even purchased in the first place. Nearly 74,000 taxpayers already owned a home, apparently under the impression that the “first time homebuyer’s” bit didn’t apply to them. Many were over the income limit or applied for more credit than they were entitled to received.

Over 3,000 taxpayers did not file with a Social Security number, using an ITIN instead. The IRS issues ITINs to individuals who need a taxpayer identification number but who are not eligible for a Social Security Number. Both resident and nonresident aliens are eligible to apply for an ITIN but the numbers of taxpayers with ITINs claiming the credit has lead some to believe that significant refunds were paid to those illegally living in the country and not eligible for the credit.

All honest mistakes? Not quite. The IRS has flagged at least 8,000 claims for criminal fraud. Currently, 115 are under investigation as criminal cases.

Despite all of the bad news, realtors and not surprisingly, bankers, want to extend the credit. Some on Congress seem to agree including Sen. Johnny Isakson (R-GA), who wants to expand the credit to dole out refund an additional $17 billion. Billion.

However, the White House is not as positive. Treasury Inspector General J. Russell George said, “Based on the administration of the credit today, I am very concerned about the IRS’s ability to effectively administer the credits that are claimed before the Dec. 1 deadline, let alone any credits that may be claimed within future extended deadlines.”

In response, the National Association of Realtors had this to say: “Without congressional action now, the market and our national economy may freeze again — possibly as soon as this month.”

Which begs the question: why not watch and see? Is it possible that a market solely driven by government incentives to buy isn’t a real market at all? Fraud notwithstanding, is the credit just creating false demand or accelerating existing demand? If we give an incentive to buy today instead of tomorrow, who buys tomorrow? Do we keep incentivizing until we can’t stop?

This worries me (yes, I’m channeling a little Tim Gunn here). I’m not really a fan of tax policy solely to manipulate behavior in the first place (home mortgage interest deduction, for example). But once you start, how do you pull the plug?

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Ask the taxgirl: Mortgage and Housing Tax Credit

July 8, 2009 · 5 comments

Taxpayer asks:

I must say I enjoy reading your blog! A somewhat tax professional myself (I deal in state taxes), I am constantly asked Federal Tax questions and use your blog as an aid! So here’s my question:

Would purchasing a home, via taking over the payments, qualify for the New Home Buyer tax credit? There will be no formal closing, just an assumption of the mortgage.

Taxgirl says:

Thanks for the kind words!

I’ve thought about your question and with the limited facts as presented, here’s my gut answer…

To qualify, I think that you actually have to transfer title of the home even if there’s no “formal” settlement. Simply holding onto a mortgage doesn’t convey ownership of the property. However, if it’s a bona fide transfer for consideration, I would say that it still qualifies, even without a “formal” settlement.

But there is a “but” (of course). If I had to guess, I would say that it sounds like a related party might be taking over the mortgage. True? In that case, the “buyer” is definitely not entitled to the credit. The credit is not available for sales to or from related parties. Related parties would include your spouse, parents, grandparents and so forth up the line and then back down again via lineal descendants (children, grandchildren, etc.). Related parties also include corporations and partnerships in which you directly or indirectly owned at least 50% of the stock or ownership interests.

Other restrictions apply. To qualify for the credit, you must be a “first-time home buyer” which is defined by statute as a buyer who has not owned a principal residence (vacation homes or commercial properties do not count) in the three years prior to the purchase. For married taxpayers, the restriction does take into consideration a home owned by a spouse (in other words, if you have not owned a home in the past three years but your spouse has, neither of you qualify).

Phaseouts and income caps also apply. The income limit for single taxpayers is $75,000; the income limit is $150,000 for married taxpayers filing a joint return. The credit is subject to phaseouts and is eliminated at $95,000 for single taxpayers and $170,000 for married taxpayers.

Check the instructions for federal form 5405 for more details (available here for download as a pdf).

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

Have a question? Ask the taxgirl! – Now on Facebook!

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Housing Credit Bill Survives Debate (Psst, I Still Don’t Like It)

February 9, 2009 · 12 comments

As of this evening (Monday), it seems that the Senate version of the housing bill will make it intact to the vote on tomorrow. And you know that I’m not a fan. I promised that I’d explain why I think it’s a bad idea. It’s taken a few extra days (yes, a plague of biblical proportions seems to have fallen on my house) but here goes…

The original bill, as passed in the fall, was a $7,500 federal income tax credit for “first time homebuyers” that had to be repaid over 15 years. In that way, it was like an interest free loan. Phaseouts apply for single taxpayers at $75,000 and married taxpayers at $150,000.

The second version of the bill, which was not made law but passed in the House, was to revoke the repayment requirement, and offer a straight $7,500 federal income tax credit for “first time homebuyer.”

The final (?) version of the bill, which is not yet law, is a $15,000 federal income tax credit with no repayment requirement. A key difference in this final version from the House version is that this credit is nonrefundable, meaning you can only receive the credit if owe federal income tax; the Senate bill would also allow taxpayers to tax the credit over a period of two years. The Senate version of the bill is not limited to “first time homebuyers” and will be effective as of the date the bill is signed into law. It would not be retroactive and it would last for one year. A repayment requirement would apply if the home is sold within two years.

Whew. So much wrong, I almost don’t know where to begin.

Let’s start with the obvious: who is buying these homes? You would think, from all of the incentives in this bill to encourage home buying, that the problem is one of demand. But that’s not true. The current housing crisis is not due to a lack of buyers, but a lack of qualified buyers. In the current economic crisis, there is a lack of housing credit. Even banks that have taken TARP money, ostensibly to free up assets in order to extend credit, are not offering credit as easily as before. Perhaps that’s a good thing. But the bottom line is that with limited mortgage credit available, home ownership will not increase, tax credit or no tax credit.

Which brings us to the next issue: how much are these homes? I’m betting about $15,000 more than they would be without the credits. Credits are dollar for dollar reductions in tax due (not like deductions which are reductions in taxable income). More or less, a tax credit is like a “dollars off” coupon. That means extra dollars in your pocket. Good, right? Well, wait a second. If I’m selling you a home and I think you’ll pay $150,000, what do you think I’ll ask for the home? Not $140,000. These tax credits will likely have the result of artificially inflating market prices – remember, sellers now understand that there’s a huge credit at play.

Think I’m kidding? The NY Times ran a great piece that linked the capital gains tax breaks for homeowners in 1997 to the “bubble” that contributed to the current crisis. The tax break is said to have created a “consumption binge”, encouraging folks to buy and sell more than they would have otherwise. The Times cites a recent study by an economist at the Federal Reserve suggested that the number of homes sold subject to the capital gains tax break was almost 17% higher over the last decade than it would have been without the law. Buyers who took advantage of the capital gains break also reported spending more money and buying “more house” than they might have otherwise – a choice which many later regretted.

Of course, the tax law in and of itself did not result in the fall of the housing market. There are a host of factors at play: poor lending practices, unpredictable interest rates and overconfidence in the market all contributed. But what the tax provision did is favor one asset, real estate, over all over assets. The bill didn’t encourage savings or other investments. It didn’t encourage small business owners to invest in their own businesses. The bill simply encouraged folks to buy (and sell) real estate. And isn’t this what we’re doing all over again?

Why aren’t we encouraging saving? Why aren’t we offering real tax incentives for small businesses? Why not encourage re-investments in other markets? Instead, we’ve again singled out real estate as the most important asset in our investment arsenal. And in the process, I think we’ve changed what it means to own a home. Buying and selling homes as assets is a recent development. Prior generations bought houses to live in, not sell.

Of course, it makes sense in the abstract. Home ownership in the US is the “American dream.” In fact, we already subsidize home ownership through a mortgage interest deduction that, according to the Tax Foundation, will cost the government $100 billion for 2008. That is nearly half, annually, of what taxpayers are expected to contribute to rescue Freddie Mac and Fannie Mae. It is nearly ten times more each year than the entire housing bailout is estimated to cost taxpayers. But we don’t mind because that deduction benefits all Americans, right? Nope. Only about 30% of American taxpayers claim the deduction on their tax returns. Statistically, not overwhelming. Yet, we continue to push the idea of home ownership through tax policy.

By linking home ownership to the American dream, we’ve come to equate home ownership with the idea of prosperity. But here’s some food for thought. Home ownership in the US traditionally hovers about 70% – less than that of Mexico and India, nations that most believe are less prosperous than the US. That number is also far above the home ownership rates in Japan and Germany, which (at least before the global plunge) most would argue are countries with thriving economies.

So this all begs the question: why make home ownership the cornerstone of our economic revival?

We talk about trying to encourage those who could not otherwise do so to “follow the American dream” and purchase a home as if it will make everything better. The reality is, however, that this tax credit (as with the mortgage interest deduction) does not facilitate access to affordable housing for most Americans and it may do more harm than good. I’ve said before – and I’ll say it again – following the spectacular fall of the real estate market, perhaps it’s wise to reconsider whether promoting home ownership through tax policy is really the best use of our government dollars. What do you think?

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