The Housing Assistance Tax Act and the Emergency Economic Recovery Act

In response to the nation's economic downturn, former President Bush signed into law the Housing Assistance Tax Act of 2008 (“Housing Act”) on July 30, 2008 and the Emergency Economic Recovery Act of 2008 (“Bailout Plan”) on Oct. 3, 2008. The new laws have several significant tax-related provisions that affect individual and business taxpayers including law firms, attorneys, their staff, and their clients.

More than $15 billion in tax incentives and relief provisions are contained in the housing act and $150 billion in tax cut extensions and changes are included in the bailout plan. These acts cover areas such as a new method for certifying non foreign status on real estate transactions, a new tax credit for some first time homebuyers, excludible gains on the sale of a personal residence, accelerated alternative minimum tax and research credits, a reduction to preparer penalties standard, and a number of other provisions. Here are some highlights.

The Housing Assistance Tax Act of 2008

Alternative Method for Furnishing a Non-Foreign Affidavit

According to the housing act, a new procedure is established for avoiding withholding on real estate sales by having the seller certify his non foreign status through an intermediary. Under the old law, if a seller of U.S. real property provided the buyer with an affidavit stating it is not a foreign person along with its U.S. taxpayer identification number, the buyer did not need to withhold tax (generally 10% of the seller's gain on sale). Under the new law, the seller may as an alternative furnish the affidavit to a “qualified substitute,” which then must provide a statement to the buyer asserting, under penalties of perjury, that it has the seller's affidavit in its possession. A qualified substitute is the buyer's agent and the person (including an attorney or title company) responsible for closing the transaction (other than the seller's agent). This method may be more attractive for law firm clients since it gives some sort of assurance to the seller that its private information will be secure. The use of a qualified substitute applies to dispositions of U.S. real property interests after July 30, 2008.

First-Time Homebuyers Tax Credit

In a nutshell, the housing act will allow the federal government to make interest-free loans of up to $7,500 ($3,750 for married taxpayers who file a separate return) for low-to-moderate income taxpayers who buy a primary residence for the first time. The loan is made in the form of a refundable credit that a first-time homebuyer can claim for the year of the purchase and then pay back ratably (i.e., “recapture”) in the form of additional tax over the next 15 years. The new credit begins to phase out for married couples filing jointly with modified adjusted gross income of $150,000 and fully phases out at $170,000 ($75,000 and $95,000 for single taxpayers). The credit is allowed for purchases on or after April 9, 2008 through June 30, 2009. Attorneys or their staff who buy a first-time home during the first half of 2009 can elect to treat it as having been bought in 2008 and can claim the credit on their 2008 tax return.

New Limit on the Exclusion for Gain on Sale of a Primary Residence

The housing act modified a tax loophole that could be pertinent to those attorneys with a home office, vacation house, or rental home. Under the old law, an individual qualified for the full housing exclusion if the home was owned and occupied as a primary residence for two years out of five before it was sold. Therefore, an owner of a vacation or rental property could simply convert it to a principal residence for two years prior to its sale and the gain on the sale could be reduced by the entire housing exclusion of $250,000 ($500,000 exclusion on joint returns). An existing rule denies the exclusion to the extent you have taken depreciation on your home. A taxpayer may have been entitled to depreciation either because the house was rented out for some period or because a portion of it was used as a home office. This denial of the exclusion continues under the new law and is applied first.

Under the new law, gain from the sale of a principal residence which is allocated to periods of “nonqualified use” on or after Jan. 1, 2009 is not eligible for the housing exclusion. “Nonqualified use” is the period when the home is not used as a primary residence such as when it is used as a vacation or rental home. The gain on sale is allocated ratably to periods of “nonqualified use” based on a ratio of periods of nonqualified use (on or after Jan. 1, 2009) to total periods of time the property was owned by the taxpayer. For example, a taxpayer purchased a residence on Jan. 1, 2009, used it as a vacation home for two years, converted it to a primary residence on Jan. 1, 2011 and then sold it for a taxable gain of $300,000 on Jan. 1, 2017. In this situation, 25% of the $300,000 gain or $75,000 (two years of nonqualified use divided by eight years of ownership) is allocated to “nonqualified use” and is not eligible for the housing exclusion. The remaining $225,000 would be eligible for the housing exclusion.

Refundable Alternative Minimum Tax ('AMT') and Research Credits

Bonus depreciation was allowed again under the Economic Stimulus Act of 2008 to encourage law firms to increase investment in certain business assets and capital improvements. However, no bonus depreciation can be taken if the company has a loss because bonus depreciation is limited to taxable income. The housing act gives C corporations and S corporations (with tax at the entity level) exclusively a new option to swap otherwise allowable bonus depreciation for immediately refundable AMT and research credits. It increases limitations for AMT and research credits so that unused credits from taxable years beginning before Jan. 1, 2006 can be claimed. This may benefit an attorney's corporate clients since it allows these corporations to treat these credits as refundable credits that can generate an immediate tax benefit.

Other Miscellaneous Changes

Interest on certain types of “private activity” bonds that used to be exempt only for purposes of the regular income tax will now be exempt for alternative minimum tax purposes as well, which can benefit attorneys and their staff. This applies to bonds issued on or after July 31, 2008 if the bonds are used to finance low-income housing, mortgages for homebuyers, or mortgages for veterans.

Under the housing act there is also now more flexibility for law firm clients to lease space in a rehabilitated nonresidential building to tax-exempt tenants without jeopardizing eligibility for the rehabilitation credit. As much as 50% of the space in a nonresidential building undergoing rehabilitation may now be leased to a tax-exempt tenant without forfeiting eligibility for the rehabilitation credit. Previously the limit was 35% of the space. This change is retroactive and covers post-2007 rehabilitation expenditures.

The Emergency Economic Recovery Act of 2008

Preparer Penalties Standard Reduced

Before the bailout plan, taxpayers and tax return preparers were subject to different standards with respect to undisclosed tax return positions, an issue that caused uproar in the accounting and legal community. The new act brings back the old standard for avoiding tax return preparer penalties for undisclosed tax return positions by reducing the standard from “more likely than not” to “substantial authority” for tax preparers. This is effective for tax returns prepared after May 25, 2007. However, the “more likely than not” standard is retained for tax shelters and reportable transactions.

15-Year Straight Line Depreciation Method

The Tax Relief and Health Care Act of 2006 extended the 15-year recovery period (instead of the general 39-year period) for qualified leasehold improvements through Dec. 31, 2007 (see August, 2007 article). The bailout plan further extends the 15 year straight line depreciation method for qualified leasehold improvements placed in service before Jan. 1, 2010.

Other Miscellaneous Changes

Securities brokers will be required to report the cost basis for all stock, debt, commodities, derivatives, and other items specified by the Treasury, along with whether any gain or loss is long term or short term on securities acquired after 2010. In addition, the deadline for furnishing certain statements (i.e., 1099s to law firms) to customers is extended from Jan. 31 to Feb. 15, 2009 for the calendar year 2008.

The new law increased the AMT exemption amount from $66,250 in 2007 to $69,950 for tax years beginning in 2008 for joint returns and surviving spouses (1/2 the amount for married filing separate), and from $44,350 in 2007 to $46,200 for tax years beginning in 2008 for single taxpayers.

The ability for attorneys and their families to use certain nonrefundable tax credits (i.e., the dependent care credit, the credit for the elderly and disabled, the adoption credit, the child tax credit, and the HOPE Scholarship and Lifetime Learning credit) to offset a taxpayer's AMT (in addition to their regular tax liability) is extended through 2008.

As in 2007, distributions from Individual Retirement Accounts (IRAs) can continue to be made through Dec. 31, 2009 of up to $100,000 directly to a qualified charitable organization and will not be included in the IRA owner's income. This only applies to mandatory distributions (made on or after the date the IRA owner turns age 70 ').

Richard H. Stieglitz, a member of this newsletter's Board of Editors, is a Tax Partner and Tamir Dardashtian, Esq. is a Tax Manager in the New York accounting firm of Anchin, Block & Anchin, LLP. Mr. Stieglitz can be reached at 212-840-3456 or via e-mail at [email protected], and Mr. Dardastian can be reached at [email protected].

In response to the nation's economic downturn, former President Bush signed into law the Housing Assistance Tax Act of 2008 (“Housing Act”) on July 30, 2008 and the Emergency Economic Recovery Act of 2008 (“Bailout Plan”) on Oct. 3, 2008. The new laws have several significant tax-related provisions that affect individual and business taxpayers including law firms, attorneys, their staff, and their clients.

More than $15 billion in tax incentives and relief provisions are contained in the housing act and $150 billion in tax cut extensions and changes are included in the bailout plan. These acts cover areas such as a new method for certifying non foreign status on real estate transactions, a new tax credit for some first time homebuyers, excludible gains on the sale of a personal residence, accelerated alternative minimum tax and research credits, a reduction to preparer penalties standard, and a number of other provisions. Here are some highlights.

The Housing Assistance Tax Act of 2008

Alternative Method for Furnishing a Non-Foreign Affidavit

According to the housing act, a new procedure is established for avoiding withholding on real estate sales by having the seller certify his non foreign status through an intermediary. Under the old law, if a seller of U.S. real property provided the buyer with an affidavit stating it is not a foreign person along with its U.S. taxpayer identification number, the buyer did not need to withhold tax (generally 10% of the seller's gain on sale). Under the new law, the seller may as an alternative furnish the affidavit to a “qualified substitute,” which then must provide a statement to the buyer asserting, under penalties of perjury, that it has the seller's affidavit in its possession. A qualified substitute is the buyer's agent and the person (including an attorney or title company) responsible for closing the transaction (other than the seller's agent). This method may be more attractive for law firm clients since it gives some sort of assurance to the seller that its private information will be secure. The use of a qualified substitute applies to dispositions of U.S. real property interests after July 30, 2008.

First-Time Homebuyers Tax Credit

In a nutshell, the housing act will allow the federal government to make interest-free loans of up to $7,500 ($3,750 for married taxpayers who file a separate return) for low-to-moderate income taxpayers who buy a primary residence for the first time. The loan is made in the form of a refundable credit that a first-time homebuyer can claim for the year of the purchase and then pay back ratably (i.e., “recapture”) in the form of additional tax over the next 15 years. The new credit begins to phase out for married couples filing jointly with modified adjusted gross income of $150,000 and fully phases out at $170,000 ($75,000 and $95,000 for single taxpayers). The credit is allowed for purchases on or after April 9, 2008 through June 30, 2009. Attorneys or their staff who buy a first-time home during the first half of 2009 can elect to treat it as having been bought in 2008 and can claim the credit on their 2008 tax return.

New Limit on the Exclusion for Gain on Sale of a Primary Residence

The housing act modified a tax loophole that could be pertinent to those attorneys with a home office, vacation house, or rental home. Under the old law, an individual qualified for the full housing exclusion if the home was owned and occupied as a primary residence for two years out of five before it was sold. Therefore, an owner of a vacation or rental property could simply convert it to a principal residence for two years prior to its sale and the gain on the sale could be reduced by the entire housing exclusion of $250,000 ($500,000 exclusion on joint returns). An existing rule denies the exclusion to the extent you have taken depreciation on your home. A taxpayer may have been entitled to depreciation either because the house was rented out for some period or because a portion of it was used as a home office. This denial of the exclusion continues under the new law and is applied first.

Under the new law, gain from the sale of a principal residence which is allocated to periods of “nonqualified use” on or after Jan. 1, 2009 is not eligible for the housing exclusion. “Nonqualified use” is the period when the home is not used as a primary residence such as when it is used as a vacation or rental home. The gain on sale is allocated ratably to periods of “nonqualified use” based on a ratio of periods of nonqualified use (on or after Jan. 1, 2009) to total periods of time the property was owned by the taxpayer. For example, a taxpayer purchased a residence on Jan. 1, 2009, used it as a vacation home for two years, converted it to a primary residence on Jan. 1, 2011 and then sold it for a taxable gain of $300,000 on Jan. 1, 2017. In this situation, 25% of the $300,000 gain or $75,000 (two years of nonqualified use divided by eight years of ownership) is allocated to “nonqualified use” and is not eligible for the housing exclusion. The remaining $225,000 would be eligible for the housing exclusion.

Refundable Alternative Minimum Tax ('AMT') and Research Credits

Bonus depreciation was allowed again under the Economic Stimulus Act of 2008 to encourage law firms to increase investment in certain business assets and capital improvements. However, no bonus depreciation can be taken if the company has a loss because bonus depreciation is limited to taxable income. The housing act gives C corporations and S corporations (with tax at the entity level) exclusively a new option to swap otherwise allowable bonus depreciation for immediately refundable AMT and research credits. It increases limitations for AMT and research credits so that unused credits from taxable years beginning before Jan. 1, 2006 can be claimed. This may benefit an attorney's corporate clients since it allows these corporations to treat these credits as refundable credits that can generate an immediate tax benefit.

Other Miscellaneous Changes

Interest on certain types of “private activity” bonds that used to be exempt only for purposes of the regular income tax will now be exempt for alternative minimum tax purposes as well, which can benefit attorneys and their staff. This applies to bonds issued on or after July 31, 2008 if the bonds are used to finance low-income housing, mortgages for homebuyers, or mortgages for veterans.

Under the housing act there is also now more flexibility for law firm clients to lease space in a rehabilitated nonresidential building to tax-exempt tenants without jeopardizing eligibility for the rehabilitation credit. As much as 50% of the space in a nonresidential building undergoing rehabilitation may now be leased to a tax-exempt tenant without forfeiting eligibility for the rehabilitation credit. Previously the limit was 35% of the space. This change is retroactive and covers post-2007 rehabilitation expenditures.

The Emergency Economic Recovery Act of 2008

Preparer Penalties Standard Reduced

Before the bailout plan, taxpayers and tax return preparers were subject to different standards with respect to undisclosed tax return positions, an issue that caused uproar in the accounting and legal community. The new act brings back the old standard for avoiding tax return preparer penalties for undisclosed tax return positions by reducing the standard from “more likely than not” to “substantial authority” for tax preparers. This is effective for tax returns prepared after May 25, 2007. However, the “more likely than not” standard is retained for tax shelters and reportable transactions.

15-Year Straight Line Depreciation Method

The Tax Relief and Health Care Act of 2006 extended the 15-year recovery period (instead of the general 39-year period) for qualified leasehold improvements through Dec. 31, 2007 (see August, 2007 article). The bailout plan further extends the 15 year straight line depreciation method for qualified leasehold improvements placed in service before Jan. 1, 2010.

Other Miscellaneous Changes

Securities brokers will be required to report the cost basis for all stock, debt, commodities, derivatives, and other items specified by the Treasury, along with whether any gain or loss is long term or short term on securities acquired after 2010. In addition, the deadline for furnishing certain statements (i.e., 1099s to law firms) to customers is extended from Jan. 31 to Feb. 15, 2009 for the calendar year 2008.

The new law increased the AMT exemption amount from $66,250 in 2007 to $69,950 for tax years beginning in 2008 for joint returns and surviving spouses (1/2 the amount for married filing separate), and from $44,350 in 2007 to $46,200 for tax years beginning in 2008 for single taxpayers.

The ability for attorneys and their families to use certain nonrefundable tax credits (i.e., the dependent care credit, the credit for the elderly and disabled, the adoption credit, the child tax credit, and the HOPE Scholarship and Lifetime Learning credit) to offset a taxpayer's AMT (in addition to their regular tax liability) is extended through 2008.

As in 2007, distributions from Individual Retirement Accounts (IRAs) can continue to be made through Dec. 31, 2009 of up to $100,000 directly to a qualified charitable organization and will not be included in the IRA owner's income. This only applies to mandatory distributions (made on or after the date the IRA owner turns age 70 ').

Richard H. Stieglitz, a member of this newsletter's Board of Editors, is a Tax Partner and Tamir Dardashtian, Esq. is a Tax Manager in the New York accounting firm of Anchin, Block & Anchin, LLP. Mr. Stieglitz can be reached at 212-840-3456 or via e-mail at [email protected], and Mr. Dardastian can be reached at [email protected].