Raw Finance

Legislation passed by the Senate on Nov. 5, 2009, in a 98-0 vote, approved by the House in a 403-12 vote on November 6, and signed into law by President Obama on Nov. 6, 2009, extends the First-Time Homebuyer Tax Credit to extend through May 1, 2010, a $8,000 first-time homebuyer tax credit and create a new $6,500 credit for homebuyers who have been in their current residence for the last five years or more.

Since most residential real estate transactions typically take about two months to go from contract to closing and the tax credit applies to home sales closed by May 1, 2010, (see additional exception below), individuals who would like to take advantage of the expanded credit would generally need to have a purchase under contract by the end of February.  However, a Senate amendment allows a taxpayer who enters into a binding contract to purchase a primary residence by May 1, 2010, to close on the property by July 1, 2010.  For the housing industry, this could point to an unusually busy winter and early-spring season, and more skewed home purchase figures during m0nths that are typically slow.

One key question is whether this extension will pull sales that would have occurred in spring and summer next year back into the winter and early spring, possibly setting up a disappointing summer selling season.  On the other hand, the expansion of the credit might spur sales that otherwise would not have happened as many homeowners feel trapped in their current homes.  We will be keeping a close eye on the home sale numbers early next year.

Residential real estate often spurs the economy out of a recession.  One reason why this recovery is expected to be painfully slow is that residential real estate is expected to continue price declines for another year or two, possibly longer, due to a backlog of foreclosures.  Perhaps the tax credit extension, along with a more general recovery in economic activity, will light a fire and rekindle the housing market.  That is probably wishful thinking, but the negative case for housing is well-documented, and so, we need to be on the lookout for positive developments that could change expectations.

Unemployment

The bill also provides 14 weeks of unemployment insurance to Americans in every state, with an extra 6 weeks of jobless benefits for those workers in states with average, three-month unemployment rates above 8.5 percent.

That differs a bit from the proposal House lawmakers approved in September, which only offered additional weeks of unemployment benefits to states that broke the 8.5 percent jobless threshold.

Corporate Taxes

The legislation would also give tax breaks to big companies hit by the recession, while raising other corporate levies, particularly for multinationals.

The proposed tax increases are aimed at offsetting the cost to the government of the tax breaks, making the exact impact on individual businesses and industries difficult to judge.  But business leaders worry that the measure could be a sign of more taxes to come, as lawmakers seek ways to pay for new measures without adding to the gaping federal deficit.

Tax considerations are likely to become a bigger concern for investment strategies.  Obviously, personal income tax rates impact decisions about short-term gains and losses, but do not forget that the capital gains tax (the tax on investments held for at least one year) is at a historic low of just 15 percent.  Investors need to be wary of any move by the government to alter this rate, as it would not only have personal implications, but may severely wound markets in the tax year prior to the change.  To date, there has been no government discussion of changing the capital gains tax rate.

Please click on the following link to view the legislation as passed by the Senate:  Worker, Homeownership, and Business Assistance Act of 2009.

For complete information on the tax credit, please click the following link to visit the IRS’s Web site:  First-Time Homebuyer Credit Page.