Mortgage Crisis: What is the Housing Assistance Tax Act of 2008?
In response to the mortgage crisis and rising foreclosure rates, Congress passed the Housing and Economic Recovery Act of 2008. In addition to aid for borrowers, communities, and Fannie Mae and Freddie Mac, the new law contained tax provisions designed to encourage home ownership and the creation of affordable housing. These provisions, titled the Housing Assistance Tax Act of 2008, provided $15.1 billion in tax incentives, including a credit for first-time homebuyers, a standard deduction for property taxes, and an increase in the low-income housing tax credit (LIHTC). These costs were offset by a variety of new provisions, including a requirement that merchants report more information about credit card transactions to the IRS.
- The act established a refundable credit for first-time homebuyers, equal to 10 percent of the purchase price of a home—up to $7,500—for homes purchased between April 9, 2008, and June 30, 2009. Homeowners were required to repay the credit—interest-free—over 15 years, starting two years after claiming the credit. The new credit was estimated to cost $4.8 billion over 10 years. Subsequent legislation waived the repayment requirement, increased the maximum credit to $8,000, and extended the purchase deadline to April 30, 2010, at an additional revenue cost of $17.5 billion over 10 years.
- The act allowed homeowners who claim the standard deduction on their income tax to deduct up to $500 ($1,000 for joint filers) of property taxes paid during 2008. Previously, only itemizers could deduct property taxes paid to state and local governments. The new deduction was estimated to reduce 2009 revenues by $1.5 billion. The Emergency Economic Stabilization Act of 2008 extended this provision through 2009, reducing revenues by an additional $1.5 billion in 2009 and 2010.
- The act increased and simplified the LIHTC, which subsidizes the acquisition, rehabilitation, or construction of low-income rental property. The new law raised states’ credit allocations from $2.00 per resident to $2.20 per resident for 2008 and 2009 at an estimated cost of $1 billion over 10 years.
- State and local governments sell mortgage revenue bonds to finance below-market-rate mortgages for certain first-time homebuyers. The act temporarily extended the program, allowing the use of bond revenues to refinance existing subprime loans and permitting states to issue an additional $11 billion in mortgage revenue bonds in 2008. This provision will cost an estimated $1.475 billion over 10 years.
- Other tax incentives in the new law simplified tax-exempt housing bonds, reformed real estate investment trusts, imposed alternative minimum tax (AMT) limitations, increased corporate AMT and research and development credits, and expanded the rehabilitation tax credit.
- The new law offset the cost of tax incentives with various revenue-raising provisions. A provision requiring merchants to report credit card purchase information to the IRS will raise an estimated $9.5 billion. Other offsets include reducing the home sale exclusion, delaying the effective date of worldwide interest allocation rules benefiting multinational corporations, and accelerating estimated tax payments for large corporations.