Look A Little More Closely

Look CloselyOn Saturday's NRVLiving Real Estate Show (which, coincidentally, we don't have an electronic 
copy of – argh), we spent a good bit of time discussing HR 3221 – the Housing and Economic Recovery Act of 2008.  This bill was introduced in July 30 2007, tweaked and massaged and – as evidenced by its 694 pages and 237 Amendments – added to several times until it was signed into law exactly one year later by President Bush on July 30 2008.

So what it is it?  According to the House Committee on Financial Services, the bill is designed to respond to the housing crisis and prevent a repeat of problems.  A good idea, yes, but look a little closer … when you dig into it, there are some highlights that every American should be aware of, regardless of whether you're a homeowner or not.  Some of the key points include:

  • Conforming loan limits have been raised to $625000.  recently, the conforming loan lmit – those loans that would be eligible for purchase by either Freddie Mac or Fannie Mae – was capped at $417000 previously.  In high-priced areas, as loans have been harder to come by, fewer homeowners have been able to qualify for these loans … I'm sure the hope is that this will stimulate this section of the market.
  • The one that most folks have likely heard of is the FHA Foreclosure Rescue.  Under this section, the Federal Housing Administration will take on as much as $300 billion in new mortgages.  Lenders will be able to write down qualified mortgages to as much as 85% of the appraised value, and then the borrower can then refinance into an FHA-backed, 30-year fixed mortgage at 90% of the appraised value.  There's a catch, of course – borrowers will have to share 50% of all future appreciation with the Federal Housing Administration.
  • The First-Time Homebuyer Tax Credit will apply to homes purchased on, or after, April 9 2008 and before July 1 2009.  If you're a first-time buyer though, don't get too excited.  It's not really a credit, but an interest-free loan for $7500 that you'll be required to pay back.  If you own the home for 15 years, you'll pay it back during that time period, at $500 per year.  If you own the home for LESS THAN 15 years, and there's enough gain at the time you sell, you'll pay the remainder back at that time.  You have to qualify, of course – single home buyers must make less than $75000, and married couples less than $150000.  When the median salary is much less than that in the New River Valley, I'd think a lot of first-time buyers would want to take advantage of this.

  • This next one is important, though, and one about which I expect a lot of people are going to be surprised.  It used to be that when you sold a home, if it had been your primary place of residence for two of the last five years, any money you made on the sale of that home was yours to keep, tax free.  $100000 profit?   Yours to keep, thank you very much!  Under HR 3221, however, the Capital Gains Exclusion Rule comes into play, and hits American homeowners right in the wallet.  It works based on a formula (congrulations, elected officials, for making it SIMPLE):
    Profit from sale * (# of days home was primary residence / # of days you owned the home)
  • So, say you bought a Blacksburg home for $300000 on January 15 2004, you lived in it for four years, and moved out January 15 2008.  On January 15 2009, you sold it for $500000, making your capital gains $200000.  Under the old system, you'd have $200000 in your pocket, tax free.  Now, with the Capital Gains Exclusion Rule, it looks like this:

          200000 * (1460 / 1825) = $200000 * .80 = $160000

$160000 of your profit will be exempt from capital gains, but there's $40000 left over the federal – and state – government would like a piece of.  The federal capital gains rate is 15%, while the VA rate is 5.75%, so 20.75% – or $8300 – of that money you'll never see.

Good idea?  Bad idea?  According to GovTrack.us, the cost per American is $4 between 2008-2012.  It seems to me that, while things like first-time buyer credits and lender write-offs might help stabilize and boost buyer confidence in some areas, things like the Capital Gains Exclusion Rule are just going to piss people off.  And, at $8300 as in the example above, cost far more than just $4.

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8 comments

  1. Jeremy Hart says:

    Stu, if you’re doing a 1031 exchange on any kind of property, this rule won’t apply because the exchange will have to follow different types of rules. For most sellers, a 1031 does NOT work because the property they’re selling has been a primary residence, and thus subject to capital gains. For those sellers who are selling investment property, be it land / apartments / commercial etc., if they’re not exchanging their property for another and are receiving income, then they’ll be taxed at the capital gains rate like everyone else.

    Good question though – I should cover 1031 exchanges again on the blog soon.

  2. Jeremy Hart says:

    Stu, if you’re doing a 1031 exchange on any kind of property, this rule won’t apply because the exchange will have to follow different types of rules. For most sellers, a 1031 does NOT work because the property they’re selling has been a primary residence, and thus subject to capital gains. For those sellers who are selling investment property, be it land / apartments / commercial etc., if they’re not exchanging their property for another and are receiving income, then they’ll be taxed at the capital gains rate like everyone else.

    Good question though – I should cover 1031 exchanges again on the blog soon.

  3. stu says:

    Great post Jeremy! I had no idea about this rule and a quick tally it would cost me $4000 to sell my rental property. So what this rule is really doing is penalizing those people who are responsible with their money and do the right thing, and that $4000 goes to bail out those who are not responsible, how is this fair? Yeah, it is not $4 but $4000. Big difference…

    Also, how does a 1031 land exchange play into this? Will that rule hold up?

  4. stu says:

    Great post Jeremy! I had no idea about this rule and a quick tally it would cost me $4000 to sell my rental property. So what this rule is really doing is penalizing those people who are responsible with their money and do the right thing, and that $4000 goes to bail out those who are not responsible, how is this fair? Yeah, it is not $4 but $4000. Big difference…

    Also, how does a 1031 land exchange play into this? Will that rule hold up?

  5. Jeremy Hart says:

    You know what, Bill? I think you’re right. Seems to me I remember something about this as well.

    Well, squeeze it in they did – it was on page 690 of 694. I know we’ve gone to closings with owners who’ve lived in the home they’re selling for a long time, who’ve still not understood the capital gains exclusion as it used to exist. There are going to be a lot of people now who will be more confused than ever.

  6. Jeremy Hart says:

    You know what, Bill? I think you’re right. Seems to me I remember something about this as well.

    Well, squeeze it in they did – it was on page 690 of 694. I know we’ve gone to closings with owners who’ve lived in the home they’re selling for a long time, who’ve still not understood the capital gains exclusion as it used to exist. There are going to be a lot of people now who will be more confused than ever.

  7. Bill says:

    The gov’t has been trying to get at that money for a long time now. They had first talked about changing it when they discussed making major changes to the tax code last year (which never happened), but I guess they figured they could squeeze it into this bill and hopefully not too many people would notice. I think it’s a bunch of hooey, but I am never surprised when the gov’t tries to get more, more, more.

  8. Bill says:

    The gov’t has been trying to get at that money for a long time now. They had first talked about changing it when they discussed making major changes to the tax code last year (which never happened), but I guess they figured they could squeeze it into this bill and hopefully not too many people would notice. I think it’s a bunch of hooey, but I am never surprised when the gov’t tries to get more, more, more.

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