The New Housing Bill

Monday, President Bush signed the Housing and Economic Recovery Act of 2008 into law and the press jumped on the obvious storylines:

1. First-time home buyers get a $7,500 purchase "credit"
2. Conforming loan limits move to $625,000
3. Delinquent homeowners get a lifeline from the FHA
4. Local governments get federal money for buying and restoring foreclosed homes

However, their are three problems with the new bill that you may want to know about. The first is in a section called "Revenue Offsets", there's an important tax implication. The new housing law changes the way in which capital gains exclusions are calculated on the sale of a residence.

Under the old system, a taxpayer was entitled up to $250,000/$500,000 of tax-free gains from the sale of a home if filing separately/jointly provided he lived in the residence for at least 2 of the preceding 5 calendar years.

Savvy homeowners exploited this verbiage, moving from home-to-home every 2 years to avoid paying capital gains.

The new law thwarts this tactic.

Capital gains exclusions are now calculated by taking the capital gains on the sale of the home and multiplying it by a ratio of how long a person has lived in a home, by how long that person owned the home.

In the example above, a person living in a home for 2 of 5 years would be entitled to 40 percent of tax-free gains on a home sale instead of all of it. As always, however, it's best to talk with a qualified accountant about how tax code changes may impact you personally.

The new capital gains rules go into effect starting January 1, 2009.


The second problem, is that the bill eliminates down payment assistance.

Currently under FHA you have to put 3% down and it can come as a gift from the seller. Which means you can essentially buy a home with nothing down (100% financing).

The bill contains a provision (SEC. 2113) which forbids FHA from insuring mortgages in which the borrower’s downpayment comes from a private downpayment assistance provider.

This will take place October 1, 2008. So, in other words, as of that date you can no longer do 100% financing when buying a home. You have a down payment.

The third problem with the bill, is that the down payment on FHA will go up from 3% down to 3.5%.

This will also take place October 1, 2008.