Housing and Economic Recovery Act of 2008

Posted on November 12, 2008 by Nancy Liu | Category: Real Estate

Homeowners Benefit from the Housing and Economic Recovery Act of 2008

The last article has thoroughly described the tax credit benefit the Housing and Economic Recovery Act of 2008 (HERA) has brought to first-time home buyers.  In this article, let’s talk about what benefit HERA has brought to general property owners.

The first benefit HERA brings to general property owners is the additional opportunity to deduct property tax in personal income tax.  In the past, homeowners could only include property tax as taxable income in itemized deduction on Schedule A.  If for any reason the homeowner did not use itemized deduction, and used standard deduction instead, the property tax paid will not be considered deductible.  The HERA allows homeowners who use standard deduction a property tax deduction of $500 ($1000 for joint return).  If you file your own tax return, be sure to purchase the newly updated software in order to utilize this benefit.

Also, HERA allows investment and rental property owners a chance to avoid capital gain tax.  Previously, if the capital gain from selling of principal residence is less than $250,000 ($500,000 for joint), homeowner is exempted from capital gain tax.  Some property investors had fully utilized this benefit and purchased property, use it as principal residence for two years as required by law, and sells it to earn profit while avoid capital gain tax.  However, for a investor with second home or rental property, the profit earned will be taxed for capital gain.  For instance, if you bought a rental property for $100,000 and sold it in two years for $150,000, the profit of $50,000 will be taxed at 15% of capital gain tax, which is $7500.

According to the HERA, if you covert your second home or rental property to your principal residence, and depending on the number of years you have used the property as your principal residence, you could still qualify for an exclusion of $250,000 ($500,000 for joint) on capital gain tax.  This will begin on January 1, 2009.  For example, Mr. and Mrs. Smith bought a second home by the beach as their vocation house with $400,000 on March 1, 2009.  Since March 1, 2012, they retired and moved to the beach house and used it as their principal residence.  They sold the beach home in 2014 for $600,000 and gained $200,000 as their profit.  During the 5 years (2009 – 2014) they owned the beach house, Mr. and Mrs. Smith had used the beach home as their principal residence for two years; therefore, the 2/5 out of the $200,000 profit they gained is eligible for the $500,000 exclusion from, and the rest of $120,000 (3/5 x $200, 000) will be taxed for capital gain according to the tax rate in 2014.  If the capital gain tax in 2014 is 15%, then Mr. and Mrs. Smith saved $12,000 ($200,000 x 2/5) in capital gain tax.  This is a good amount saved in taxes. 

So how does one applies this new law into practical use?   Investors can convert their rental property or second home into their principal residence and reduce capital gain tax; the longer the house is used for principal residence, the larger percentage of the profit can become excludible from capital gains tax. 

This article is only for your reference. Please do not apply mechanically to any exact cases. You are welcome to consult our attorneys at Liu & Associates, P.C. For contact information, please click here.