Homebuyer Credit Extension and Expansion

In a recent post on Angry Bear, I note that the Senate is moving closer to extension and expansion of the homebuyer credit.  Here's the start of the post (read the rest at Angry Bear, along with a number of thoughtful comments).

Part of the reason for our ongoing Great Recession is that we have had so many measures in the tax code to favor home ownership that (i) banks started to think of mortgage securitization business as money growing on trees and (ii) homeowners started to think of their homes as money-growing trees. The bubble burst when the whole house of cards almost came tumbling down--it was revealed that banks had lent money through sub-prime mortgages to people who couldn't afford to make the payments, that people were hoodwinked into getting subprime mortgages (at higher costs) that could have afforded a regular mortgage, that house prices could not just keeping climbing.

Nobody liked the way the "market correction" worked--foreclosures, evictions, job losses and home losses heaped on top of each other. Made especially bad when banks foreclosed on individuals for falling short on payments, refused to accept "short sales", and then ended up letting the houses deteriorate and selling them for much less in foreclosure sales. Made worse when we watched the bailout drama unfold, with investment banks and companies like AIG (investment banks' friendly insurer and credit default contract counterparty) saved with trillions of dollars of federal tax money on the line, while home foreclosures for ordinary people continued.

Congress couldn't get the will to pass a bill to permit modification of home loans in bankruptcy--the one bill that would have done the most to save current homeowners from losing their homes and the social/economic disruption such a loss causes.

But somehow it managed, as part of the economic stimulus bill, to pass a tax cuts to encourage people to buy homes who hadn't owned one before. I thought that bill was problematic from the beginning. ....

I had my costs wrong.  I'd seen an estimate for the cost of the homebuyer extension and expansion at $17 billion.  Today, the JCT issued new documents about the Worker, Homeownership, and Business Assistance Act of 2009:  Estimated REvenue Effects (JCX-45-09) and Technical Explanation (JCS-44-09).  Over the next ten years, the homebuyer tax credit is estimated to cost about $10.8 billion (but almost $10 billion in 2010 alone) and the NOL carryback about $10.4 Billion (but more than $33 billion in 2010). 

More on the homebuyer credit.  The extended credit applies as before, providing $8000 or 10% of the purchase price (with no credit allowed on a house costing more than $800,000) but now starts to phase out at $225,000 for joint filers (and is not available to those making more than $245,000) and applies to purchases with binding contracts before May 1, 2010 and closings before July 1, 2010.  Those who purchased under the 2008 credit are supposed to repay the credit, while those who purchased with the 2009 credit aren't subject to the recapture if they live in the home for three years after the purchase (even though--remember--gain on the sale of a home is completely excluded from profit).  That the credit can be bought for such an expensive home, that the credit is available to taxpayers with almost a quarter of a million of annual income, and that the 2009 and 2010 credit need not be repaid--all these factors suggest that this credit is a boondoggle that continues the market distortion in favor of housing while favoring some taxpayers over others and not even restricting such a ridiculous giveaway at least to those who are in the lower middle class.  The expansion is even more absurd.  Long-time residents (five out of eight years) can get a $6,500 credit as though they were first time homebuyers.

More on the NOL provision.  The temporary rule allowed businesses satisfying the $15 million gross receipts test to have an extended carryback period for 2008 NOLs.  The expansion allows the same extended carryback to most businesses with 2008 or 2009 NOLs (with limits for the amount that may be carried back to the fifth preceding taxable year), suspends the 90% AMT limitation, increases the carryback for life insurance companies.   Small businesses that elected the 2008 carryback also can elect the 2009 carryback.  Generally, businesses in which the Federal government has an equity interest are not eligible; financial institutions in which the government acquires an interest after the provision is enacted under the 2008 economic stimulus legislation are excepted.

How does the Congress pay for this giveaway?  Primarily by delaying yet again, for seven years, the implementation of another tax cut originally passed some years ago as part of the Bush Administration's package of big-business-friendly tax packages--the 2004 misnamed "American Jobs Creation Act" provision that permitted multinational corporations to elect to allocate interest expense on a world-wide basis, thus reducing, in most cases, their overall US tax liability.  That raises slightly more than $20 billion over ten years (though it won't raise anything in 2010, when the other provisions are costing the most).  And by accelerating the corporate estimated payments for 2014 (33% increase in the July, Augus or September 2014 estimated payments), with next required payment decreased accordingly.  That'lls raise about 18 billion in 2014 (and it is not shown as a negative for 2015-2019, since it is just a fake revenue increase from accelerating the timing of when payments are due).

Other provisions of interest.  The bill also includes a change to the penalty for failure to file a partnership or S corporation return, increasing the penalty from less than $100 per partner or shareholder to almost $200 per partner or shareholder.  It also mandates electronic filing by professional tax return preparers who file at least 250 returns during the calendar year.  (That should probably be 100 rather than 250.)

Comments

[Raza]

Thank you for your Excellent post, Linda -

[Stephen V.]

This is lame top-to-bottom imho. IRS is trying to make up for the PR debacle of a report that a 4yr old received the CRedit so they are now doing audits of most HB Credits.
I have one on my desk now that asks for *an original letter from a government entity bearing the official raised seal.* Quote, unquote. Wha?
So I called IRS. They are actually asking for a document that doesn't exist in AR: proof that the property tax obligation has been transferred from the seller to the buyer. We assess in the current year & pay for LAST year's tax!
On the macro-level these monies are being laundered through taxpayers to prop up values that must decline if we are ever to sort out this mess.
I apologize for my cynicism.

[LindaMBeale]

No need to apologize, Stephen. I share your concern about these credits. But it is not the IRS that is enacting them, it is Congress. The IRS is trying to crack down because there have been reports of numerous frauds (like having children buy a house as a first-time homebuyer). Reasonable basis for deciding you need to enforce, I'd think.

The credit doesn't make sense as tax policy and it doesn't make sense as economic stimulus. It just delays the ultimate final correction in housing prices. I suspect every Congress person got emails from some constituent wanting to buy a house and hoping that the credit can be extended (or expanded) so that they, too, can get a taxpayer handout. I'd bet that many of those in the $225,000 range who will gladly take advantage of this handout (and even lobby their representative to support the bill enacting it) are the same people who adamantly complain about "entitlements" and think that "giveaways" to the poor are a problem...

[Michelle Boudreau]

Credit extension have been used by home buyers with proper implementation of credit policies in order to avail long term benefits .