If you are a taxpayer who does not itemize, you might benefit from a new property tax deduction available through The Housing Assistance Act of 2008 (the “Housing Act”). The provision creates a new standard deduction for state and local real property taxes paid by non-itemizers, which will primarily benefit homeowners who have paid off their homes.

The deduction is available only for one year and is as much as $500 for single filers and $1,000 for joint filers. Since this is a deduction and not a credit, the actual tax benefit will not be substantial, but it could still be beneficial to some taxpayers. The deduction may also be claimed for state and local taxes paid on a vacation home as well as a principal residence.

Another tax change that is included in the Housing Act is the reduced home sale exclusion for some sellers. For sales after 2008, gain potentially eligible for the home sale exclusion will be reduced proportionately for the period of time a home wasn’t used as a principal residence. The old 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 or $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 requires 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 and did not use it as their personal residence. 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. As a result, 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 or down to $80,000.

There is also a tax credit available for first time homebuyers under the Housing Act for homebuyers who purchased their principal residence after April 8, 2008 and before July 1, 2009.

For more information regarding this tax credit, please refer to the article on our website titled, First Time Homebuyers Credit, written by Jessica Burt.

For more information on the Housing Act or other tax issues, please contact one of our tax professionals.