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Tightened home sale exclusion and other revenue raisers in the 2008 Housing Act (MS Word)
Tightened home sale exclusion and other revenue raisers in the 2008 Housing Act (.pdf)
Tightened home sale exclusion and other revenue raisers in the 2008 Housing Act
Dear Reader,
To pay for the $15.1 billion of housing tax incentives in the
recently enacted “Housing Assistance Tax Act of 2008” (the Housing
Act), Congress passed several offsetting revenue raisers, including
a requirement that banks provide information returns reporting
annual credit card sales to IRS and to merchants, a provision
requiring homeowners to pay tax on gains made from the sale of a
second home to reflect the portion of time the home was used as a
vacation or rental property, and a provision delaying for one year a
“worldwide interest allocation provision” that would result in lower
taxes for some multinational companies. Here are the details of
these revenue-raising provisions.
Payment card and third party network information reporting
For returns for calendar years beginning after 2010, the new law
requires banks and online payment networks to file an information
return with IRS reporting the gross amount of credit and debit card
payments a merchant receives during the year, along with the
merchant's name, address, and taxpayer identification number (TIN).
Reporting is also required for third party network transactions.
Information reporting for third party network transactions will be
required only for merchants that have (1) annual credit and debit
card transactions exceeding $20,000 in the aggregate, and (2) an
aggregate number of such transactions during the year that exceeds
200.
Home sale exclusion rules tightened
Most homeowners are aware of the home sale exclusion, a provision of
the tax laws which provides that homeowners who sell their principal
residence typically don't need to pay taxes on as much as $500,000
of their gain if they meet certain conditions. (The $500,000
exemption is the maximum exclusion for a married couple filing
jointly; taxpayers filing individually get an exemption of up to
$250,000.) To be eligible for the full exclusion, a taxpayer must
have owned the home—and lived in it as his or her principal
residence—for at least two of the five years prior to the sale.
Because of the “principal residence” requirement, vacation or second
homes normally don't qualify for the exclusion. However, in what
some saw as a loophole, the law permitted taxpayers to convert their
second home to their principal residence, live in it for two years,
sell it, and take the full $250,000/$500,000 exclusion available for
principal residences, even though portions of their gains were
attributable to periods when the property was used as a vacation or
second home, not a principal residence.
The new law closes that “loophole” by requiring homeowners to pay
taxes on gains made from the sale of a second home to reflect the
portion of time the home was not used as a principal residence (e.
g, vacation or rental property). The amount taxed will be based on
the portion of the time during which the taxpayer owned the home
that the house was used as a vacation home or rented out. The rest
of the gain remains eligible for the up-to-$500,000 exclusion, as
long as the two-out-of-five year usage and ownership tests are met.
The new law in effect reduces the exclusion based on the ratio of
years of use as a principal residence to the total time of
ownership. For example, if a taxpayer owned a vacation home for ten
years, but lived in it as a principal residence only for the final
two years prior to sale, the maximum available exclusion would be
reduced by four-fifths. Accordingly, a $400,000 gain on the sale
that would be eligible for the full exclusion under pre-Act law
would be reduced by four-fifths, to $80,000.
The good news for current owners of second homes is that the new law
is not retroactive. The tightening applies only to sales after 2008.
Plus, any periods of personal or rental use before 2009 are ignored
for purposes of the provision. Also, the new law doesn't change the
rule that allows homeowners to take advantage of the home sale
exclusion every two years. Taxpayers can still “home hop” with full
tax exclusion if they only own one home at a time. Moreover, the
taxpayer still qualifies for capital gain treatment on the amount of
gain that cannot be excluded.
Delayed implementation of worldwide allocation of interest
In 2004, Congress provided taxpayers with an election to take
advantage of a liberalized rule for allocating interest expenses
between U.S. sources and foreign sources for purposes of determining
a taxpayer's foreign tax credit limitation. Although enacted in
2004, this election was not scheduled to be available to taxpayers
until tax years beginning after 2008. The new law delays the
phase-in of this new liberalized rule for two years (to tax years
beginning after 2010). Special transition rules apply in the first
year that the liberalized rule phases in.
I hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to call.