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FANNIE, FREDDIE... IRS?

July 29, 2008

So we are in a great big mess because of the incontinent lending practices of the exquisitely well-connected Fannie Mae and Freddie Mac. So how do you solve the problem? Privatize? Nationalize?

Neither. You cut the IRS in on the action!

The "Housing Assistance Tax Act if 2008" -- the tax title of H.R. 3221, the housing train wreck that the President is about to sign -- makes makes the IRS the lender of first resort for "first time homebuyers" by providing a strange new tax credit. This tax credit, available for those buying homes in 2008 and 2009, will then have to be paid back as an additional tax, but without interest, over 15 years, starting with the second year after the credit is taken. That makes the credit an interest-free loan by the IRS.

How it works

This new credit is 10% of the purchase price of a house purchased in 2008 or 2009 by a qualifying "first-time" homebuyer. The maximum credit is $7,500 ($3,500 for married taxpayers filing separately). A first-time homebuyer is someone who had no ownership of a "principal residence" during the three-year period before the day the house was purchased.

It wouldn't be a tax law without a lot of confusing limitations and requirements. The bigger ones include:

- You have to acquire the property between April 9, 2007 and July 1, 2009. If you are building the property, you have to move in by July 1, 2009.

- The credit phases out for taxpayers with adjusted gross income exceeding $75,000 ($150,000 for joint filers) over a $20,000 range. This means the credit is $0 at $95,000 AGI, or $175,000 for married taxpayers.

- No credit is allowed if the residence is purchased from a spouse, ancestor or lineal descendant.

- No part of the residence can be acquired by gift or inheritance.

- The credit is unavailable to a non-resident alien.

If you sell the property before the end of the 15-year "recapture period," you have to pay back any of the credit that hasn't yet been recaptured.

2008 refunds for 2009 purchases

If you buy the house in 2009, you can claim the credit on an amended 2008 return. If you use one of the loan shark rapid refund services, this makes the credit very close to "down payment assistance." Another provision of H.R. 3221 outlaws seller-financed down payment assistance. Apperently Congress doesn't want any competition.

And to think that Congress ignored serious alternative legislation, "H.R. 7802".

Tags: HR 3221.tax policy.

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