Real Estate Matters

What the Stimulus Means for Your Taxes

By Ilyce R. Glink with Samuel J. Tamkin
Saturday, February 28, 2009

As we move further into tax season, Treasury and Internal Revenue Service employees have been busy filling in the missing pieces on all the new tax laws that were passed in the recent stimulus package.

When it comes to real estate, the rules are at best confusing. Let's shed a little compact fluorescent light on the subject:

-- The 2008 vs. 2009 tax credit. If you were a first-time homeowner who purchased from April 8 to the end of the year, you could get a $7,500 tax credit on your 2008 tax return. This is a tax credit, which means that even if you don't pay $7,500 in taxes, you'll still get that much in the way of a refund, provided you meet other qualifying criteria, according to Mark Luscombe, principal analyst for the tax and accounting group at CCH.

However, the $7,500 must be paid back in $500 installments over 15 years, which means it effectively functions as a zero-interest loan. Luscombe said the fine print in the new law says that if the taxpayer dies, the rest of the payback is forgiven. It's unclear whether both homeowners have to die if the property is owned jointly.

If you chose to close on Dec. 31 rather than Jan. 2, perhaps to be able to itemize the interest and points on your 2008 tax return, you may be kicking yourself. The recently signed stimulus bill took the $7,500 tax credit and turned it into an $8,000 tax credit -- and one that doesn't need to be repaid.

But there are some wrinkles. To qualify for the $8,000 tax credit, couples filing jointly must earn less than $150,000 in adjusted gross income. Also, you must stay in the house, presumably as your primary residence, for three years, or there may be some payback requirement, Luscombe says. (He's unsure how the IRS would be able to follow up, and some of the regulations and filing requirements aren't fully explained at the moment.)

The $8,000 credit is good for first-time buyers or anyone who hasn't owned a home in the previous three years from Jan. 1, 2009, through Dec. 1, 2009 -- so don't wait to close in December, or you'll miss out.

Luscombe said you could elect to take the credit on your 2008 taxes. But if you bought your house in 2009, you'll only be able to get a $7,500 tax credit. If you wait to claim the credit on your 2009 tax return, Luscombe said, you'd get the full $8,000.

-- Tax credits for going green. The stimulus package eased requirements on energy tax credits. The $500 lifetime tax credit has been increased to $1,500 for the installation of energy-efficient windows, insulation, doors, mechanical systems and the like.

In addition, you can take a 30 percent tax credit for every dollar you spend on things like solar heaters, fuel cells and heat pumps, Luscombe explained. The individual limits on particular expenditures have mostly been eliminated.

-- Foreclosure and short-sale forgiveness. For those going through foreclosure or a short sale (selling a house for less than the amount owed on the mortgage), the forgiven debt will not be taxed as income through 2012.

"Up to $2 million of mortgage debt on the principal residence that has been forgiven can be excluded from income," Luscombe explained. "Taxpayers do not have to put it on their tax form," even if the lender has sent a 1099.

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