Less-known housing tax changes

Tax breaks for owning real estate are undergoing another shift, thanks to the Housing and Economic Recovery Act recently signed into law by President Bush.

The main focus of the bill was on its provisions to stave off foreclosures and to bail out mortgage giants Freddie Mac and Fannie Mae. But there are also measures of interest to people with vacation homes, first-time home buyers or those planning to buy a home who haven’t owned one in three years, and homeowners who don’t itemize their federal tax returns.

Here’s a rundown:

Vacation homes

The housing bill closes a provision that some people with vacation homes had used to avoid paying tax on the appreciation realized on their vacation properties when they sell.

You might wonder: What does this have to do with solving the housing crisis? Nothing, really; it is designed to raise revenue and help pay for the other tax breaks in the bill.

The provision has allowed someone with a vacation home to get a tax break, providing he or she is willing to live in it for at least two years before selling it.

Under current law, taxpayers can exclude up to $250,000 per person, or $500,000 per couple, in gains on the sale of a personal residence from federal tax.

Because tax law defines a personal residence as the place where the taxpayer has lived for two of the last five years, people with vacation homes can move in for two years, sell the home and then move back to their primary residence.

But starting Jan. 1, 2009, taxpayers can exclude only the portion of the gain that corresponds to the “qualified use” of the home. That means the taxpayer will have to divide the number of years lived in the residence by the number of years it was owned to figure out what percentage of the gain is tax-free, said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

Here’s an example: If you bought the house in 2009 and owned it for 10 years but lived in it for just two, only two-tenths of the gain would be tax-free.

Even if the home appreciated in uneven fashion (as homes often do), the tax law says you have to act as if the appreciation was earned evenly throughout the time period that you owned it.

The good news is that Congress also put in a generous transition period, he said. Only the period following the law’s 2009 start date will count in the “non-qualified use” portion of the home-sale calculation.

So if you bought the house in 2000 and moved into it in 2010, selling in 2012, you would pay tax on only two years of appreciation after the law’s start date but before you moved in -- the non-qualified use in 2009 and 2010.

That makes it time to get packing, said Bob Scharin, senior tax analyst with the tax and accounting business of Thomson Reuters, about the change: “If you move in before the end of 2008, the law will not affect you at all,” he said.

A ‘credit’ you must repay

The housing act also ushered in two new tax breaks for homeowners.

The most widely touted was one that provides a tax “credit” of $7,500 for couples and $3,750 for married couples filing separately for first-time home buyers. But the credit is really an interest-free loan, not a credit in the traditional sense of the word, Luscombe said. It must be paid back in equal installments over a 15-year period.

Saying the credit is for first-time home buyers is also a misnomer. Anyone who hasn’t owned a home for three years before purchasing the home can qualify.

Before that “look-back period,” they could have been Donald Trump and it still wouldn’t matter.

“You could have owned many homes in your lifetime, as long as you didn’t own a home in the three-year period prior to the purchase of the home to which the credit will apply,” Scharin said.

There are income limits, however. Only singles earning less than $75,000 annually and married couples earning less than $150,000 annually can claim the full credit.

Once income exceeds those thresholds, the maximum credit is reduced until it is eliminated for singles earning $95,000 and married couples with $170,000 or more in income.

The credit is also temporary. It is available only for homes purchased April 9, 2008 through July 1, 2009.

One-time deduction

There are fewer strings attached to a new tax deduction for homeowners who don’t itemize deductions. The tax law gives non-itemizers a write-off to compensate them for any state and local real estate taxes they pay. The deduction is the lesser of the amount of that tax, or $500 for single filers or $1,000 for married couples.

But this deduction is available for only one year -- 2008.

This deduction is aimed at helping older homeowners, who may have already paid off their mortgages and thus don’t have enough deductible expenses to itemize. It is meant to help them through today’s tough economy.

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Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit latimes.com/kristof.