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October 9, 2008
NEW TAX LAWS REGARDING YOUR HOME
On July 30, 2008 the Housing and Economic Recovery Act of 2008 (HERA) was passed. Although this act was passed primarily to help the subprime mortgage crisis there are three items of interest that you should know about.
First, is something that will help seniors when tax time rolls around. Homeowners who take the standard deduction when filing their federal income tax return will get an extra deduction. This deduction is for 2008, and 2008 only. Single taxpayers will get a $500 deduction and married couples will receive a $1,000 deduction.
The standard deduction for 2008 will be $5,450 for single and $10,900 for married filing joint taxpayers. $6,800 is the standard deduction for a single taxpayer over 65. If you file jointly, and both of you are over 65, the standard deduction will be $13,000. These standard deduction amounts have increased each year so, without a mortgage, it is difficult to exceed and claim your actual deductions. Since most seniors have paid off their mortgages, this new deduction will be especially appreciated by seniors.
First time homebuyers also benefit from HERA. A tax credit of up to $7,500 will be given to first time homebuyers. That’s the good news. The bad news is that it is actually like a loan because the first time home buyer will have to pay it back over a 15 year period. What happens is that in the second year after you purchase your home, you pay an extra $500 in federal income taxes until you have fully given back the credit you received when you purchased the home. It probably makes sense to take the credit because it is in essence an interest free loan, but my gut tells me that 1st time home buyers are generally in a credit crunch. Tying them into extra $500 tax payments for 15 years sounds like trouble.
The last part of HERA that you should know about is also tax related. Many of you know that if you sell your home you are entitled to a $250,000 ($500,000 married filing jointly) gain exclusion so long as you own and reside in the home for 2 out of the last 5 years. This only applies to your personal residence.
Many people who own vacation or rental property and want to sell it could move into their property and stay there for 2 years to take advantage of the gain exclusion allowed for a principal residence. Congress has put a stop to that. Under the new rules, a former rental or vacation property that you have converted to your primary residence will not be entitled to the full gain exclusion when sold.
The provisions of HERA start on January 1, 2009. This means that if you move into your rental property after January 1, 2009 and later sell your property, you will have to calculate how many years the property was used as rental property (non-qualified use) and how many years you used it as your personal residence(qualified use). You then use this ratio to determine what percentage of the gain can be offset by the $250,000 gain exclusion and how much will be treated as gain from the sale of rental property.
Example: Jack and Jill purchase rental property on January 1, 2009 and rent it for 3 years. They then move into the property and use it as their residence for 2 years. When they sell it they have a $250,000 capital gain. Under the old law the entire gain would be offset by their capital gain exclusion. Under the new law 40% (2 out of 5 years) would be offset by their capital gain exclusion and the remaining 60% of the gain would be taxable.
An exception that you should know about is that if the property has always been your personal residence, and you decide to rent it for a while before selling it, the non-qualified use can be ignored, as long as you lived in it for 2 out of the last 5 years. This means that all of the gain is available to be offset by the $250,000 gain exclusion.
This general overview is not meant to be inclusive of all the rules and exceptions to the rules. You should always seek competent advice prior to entering into any major financial arrangement.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org