The housing bailout bill signed into law by President Bush July 30 has several provisions of interest to investors, including some give-aways and a few requisite give-backs. Here’s a run-down on several investment-related provisions of legislation.
Refinancing at-risk mortgages
The new “HOPE for Homeowners Program,” run by the Federal Housing Administration (FHA), will give relief to some homeowners who are at risk of having their mortgages foreclosed. The program begins on Oct. 1 and will be available through September 2011.
Borrowers may qualify to have their mortgages refinanced as fixed-rate 30-year loans if the following conditions are met:
Owners may qualify to refinance their mortgages as fixed-rate 30-year loans
- The program is available only to individuals living in their only homes. The mortgage at risk of foreclosure must have originated before Jan. 1, 2008, and the borrowers’ debt-to-income ratio must be above 31 percent as of March 1, 2008. The debt-to-income ratio is figured by dividing the borrowers’ monthly mortgage payments (including principal, interest, taxes and insurance) by their monthly income.
- Borrowers must agree to “share” future equity with the government. Specifically, if the home is sold within a year the government gets all the profit. The government’s share of the profit declines over five years, ending at 50 percent—in other words, if the home is sold after five years, the homeowner and the government split the profit 50-50.
- Borrowers must demonstrate their ability to repay the new loan.
- The mortgage owner (generally a bank or other financial services corporation) has to agree to write down (reduce) the principal on the existing loan. The new principal amount will be 90 percent of the home’s current value.
The biggest hitch with the program is that it is voluntary—neither current mortgage owners nor potential lenders can be forced to participate. It may be difficult for at-risk borrowers to find a new lender or convince the holder of the existing loan to participate.
First-time homebuyer tax credit
Purchasers who haven’t owned a home for at least three years are eligible for a “refundable” $7,500 tax credit if they purchase a new home in the United States between April 9, 2008, and July 1, 2009. The credit, which is limited to 10 percent of the purchase price, is repaid to the government over 15 years, essentially acting as an interest-free loan over that time.
For married couples filing separately, the credit for each is $3,750. For unmarried couples or groups purchasing a residence, the $7,500 credit will be split among them.
The credit is phased out for taxpayers with modified adjusted gross income above $75,000 ($150,000 for joint returns). If the taxpayer sells the home or ceases to use it as his/her principal residence within 15 years, any remaining amount not yet repaid will be “recaptured” in the year the home is sold.
Standard real estate tax deduction
Homeowners who don’t itemize deductions will benefit from a new addition to the standard deduction covering up to $500 of their property tax bills ($1,000 for joint returns). This benefit begins with tax year 2008. It does not apply to taxes on rental or business property.
Low-income housing credit
The legislation makes several changes to the program allowing tax credits to investors in low-income housing. As a temporary boost to the program, it increases the amount states will be allocated for the credits by 10 percent in 2008 and 2009.
Other changes to the program will:
Building low-income housing offers new tax credits for investors
- Increase the applicable percentage to 9 percent for newly constructed non-federally subsidized buildings placed in service after July 30, 2008, and before December 31, 2013.
- Add buildings designated by the state housing credit agency as requiring the enhanced credit in order to be financially feasible to the types of high-cost areas eligible for the enhanced 91 percent/39 percent credit.
- Make additional buildings eligible for the 70 percent credit by limiting the definition of “federally subsidized” to an obligation with tax-exempt interest.
- Increase the “minimum expenditure” requirement to the greater of at least 20 percent of the adjusted basis of the building being rehabbed, or at least $6,000 per low-income unit in the building being rehabbed. The $6,000 amount is indexed for inflation.
- Expand the allowed “community service facility” area of the building included in “qualified basis” used for figuring the credit from 10 percent to 25 percent for community service areas up to $15 million, retaining the 10 percent limit for any excess eligible basis over $15 million.
Give-backs
One revenue-raising provision will affect some home sellers. It calls for the exclusion of up to $250,000 of the gain on sale of a principal residence ($500,000 for joint filers) to be prorated based on the amount of time the property was used as the taxpayer’s principal residence in the five years preceding the sale.
If the seller lived in the home for only two of the previous five years, for example, the exclusion will be limited to 40 percent of the gain, up to $250,000. Homeowners who live in the residence for the entire five years preceding the sale won’t be affected by the change.
Other interesting provisions
Among the legislation’s many other provisions, some investor-related sections will:
- Eliminate seller-funded loans, (includes down payment assistance programs) used to help purchasers meet the capital requirements for a FHA-funded loan.
- Extend and expand some GO-Zone incentives.
- Modernize the FHA manufactured housing loan program, which provides affordable mortgage loans for manufactured homes on leased land, by raising program loan limits to keep up with inflation and restructuring the program to make loans more securitizable in the secondary market.
- Provide assistance for rehabilitation and preservation of several federally assisted multifamily affordable housing properties.
- Increase the allowable tax-exempt use percentage of a building eligible for the rehabilitation tax credit from 35 percent to 50 percent.
- Exempt interest on tax-exempt bonds of which 95 percent of net proceeds are used to provide qualified residential rental projects and on qualified mortgage bonds (including veterans’ mortgage bonds) from inclusion as an “item of tax preference” for alternative minimum tax (AMT) purposes.
- Allow the low-income housing tax credit and the rehabilitation credit to be used to offset AMT liability beginning in 2008.
