by Rachel Stockton

Created on: August 22, 2008   Last Updated: October 07, 2008

Some accountants do not see much in the way of positives in the Housing and Economic Recovery Act; I do. However, I certainly understand the apprehension. When there is yin, there is yang. No Act of legislation is all positive or all negative. Here are a few positives of the bill:

*Funding through Block Grant programs will be invested in neighborhoods the hardest hit by foreclosure. Ever noticed how abandoned homes rapidly deteriorate? Mold starts to rapidly accumulate (I find this a rather spooky phenomenon no matter how expensive the home, a few months of sitting empty, and all of a sudden green fuzzy stuff starts crawling up the sides). One of the most depressing sights I've ever seen was during the Texas oil crash of the mid-eighties; mortgage holders literally walked, turning their keys in to their loan officers. The rows of deserted suburbia, made complete with tumble weeds normally associated with ghost towns, would have been a great setting for a Twilight Zone episode. Any alleviation of this horrific eyeball assault would help.

*Homeowners will be allowed a $7500.00 credit. However, the "credit" has to be paid back in fifteen years, which means, of course that it's not really a credit at all. Also, when one considers that a 20% down payment is required when purchasing a home, $7500 is mere pocket change. Think of it this way: suppose you are purchasing a $100,000 home. $7500 is only 7.5% of the down payment you would need to come up with.

*The mortgage limit will be raised to $625,000 in areas where housing is significantly higher than average. There are no negatives, as far as I can tell, with this perk.

Here is the more problematic aspect of the Act, and that is the alteration made to the Capital Gains Exclusion Act. Prior to the 2008 Recovery Act, a home sold and lived in for 2 of the previous 5 years, could claim $250,000 profit as tax exempt. The new law would turn the newly exempted capital gains criteria to a percentage, rather than a fixed dollar amount. The formula looks like this:

Exempt
Capital Gains = Profit from sale * (Number of years home was principal residence/Number of years home was owned)

The tax difference could be devastating. Let's say you sell your home and make $250,000 in profit, but you only lived in the house three of the previous five years. Rather than exempting the entire amount, as was allowed prior to the Act, only $150,000 would be eligible.

Another "real world" example: suppose you decide to purchase a home before your current one is actually sold, and you have to lease out the new residence for a year or two. The years the property was rental instead of primarily residential would increase the amount of tax owed on the property. In essence, the IRS would consider you to be in the property management business those two years, and would tax you thusly.

Now ONE advantage of this is that this new stipulation doesn't start until January of 2009. This means that the remainder of 2008 could get a shot in the arm as homeowners scurry to sell their homes. And, of course, the primary purpose of the Act in the first place is to "unfreeze" the market, and get it flowing again.

Only time will tell what the fallout regarding the Act will ultimately be. In the meantime, rest assured that CPAs and tax attorneys will be on this one, and will hopefully come up with a compromise in the tax payers' best interests.

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