Housing Bill: No Free Lunch For Portland Homeowners

Posted on 07/30/08 9:57 AM

Implications of the Housing Bill for Portland and Beyond

A plan to rescue hundreds of thousands of homeowners at risk of foreclosure cleared the final hurdle today and was approved by President Bush. The bill takes several approaches to curing the ailing housing market, but is anchored by a $300bn rescue fund to help an estimated 400,000 homeowners get cheaper loans – widely considered the biggest and most costly bailout in American history. Ultimately the taxpayer, especially the prudent one, will have to foot the bill – not the administration. The bill also means that additional liquidity will soon hit the market. This is not good news for inflation. Nor is this bill good news for the dollar. Time will tell if we hit another all time low against the Euro.

The bill does provide some material benefits that prudent homeowners may wish to take advantage of. However, it’s important to note that (at least some of ) Uncle Sam’s gifts come with strings attached. Here’s a closer look at the two most relevant features for “regular, non-distressed” homeowners:

First-time homeowner tax credit: The law will extend a tax credit of up to $7,500 to first-time homebuyers. A first-time homebuyer is defined as someone who hasn’t owned a home in three years. The tax credit is for 10% of the purchase price, up to $7,500, but phases out for higher-income homeowners. Homeowners are eligible for the tax credit if they bought after April 8 of this year or buy before July 1, 2009. This is a tax credit, not a deduction. It reduces the homeowners’ tax bill by up to $7,500 for the tax year in which the purchase was made. It’s a one-time credit; you don’t get to keep taking it year after year. There is a catch, and that is that the money has to be repaid over 15 years, starting two years after you buy the house. That makes the tax credit an interest-free loan. If you take the full $7,500 tax credit, your income tax bill will increase by $500 a year for 15 years. If you sell the house before then, you’ll have to pay Uncle Sam the remaining balance.

Property tax deductions for all homeowners: Under current law, you can deduct your property taxes from federal income tax – but only if you itemize deductions on Schedule A. That leaves out people who don’t have enough deductions to warrant filling out Schedule A. They have to take the standard deduction and that means they can’t deduct their property taxes. The housing rescue bill changes that. For homeowners who pay property taxes, it increases the standard deduction by $500 for single filers and $1,000 for couples filing jointly. This will be a boon to people, such as retirees, who own their houses outright, and therefore don’t pay any mortgage interest, so they can’t itemize. You can’t increase the standard deduction by more than the property-tax bill. So if you’re married filing jointly and you pay $800 in property taxes, you get an $800 deduction, not a $1,000 deduction.

The bill includes several other provisions that may be relevant to you such as regulations on reverse mortgages, manufactured housing (yippie more double-wides to come!), protections for veterans etc. If you would like to find out more, click here to read all 694 pages of the bill or shoot me a note