Saturday, September 13, 2008

How Much House Can I Afford (Revisited)

Having sold my condominium, I am revisiting a calculator to find out how much house I now can afford (previous amount was $281,000).

My new inputs are:



And the results are:



I am now limited by the front end ratio of 28%. The total mortgage amount comes at $242,000 at 5.5%, and the total house value at $322,000.

Friday, September 12, 2008

New Limitations on a Popular Tax Benefit

The Housing and Economic Recovery Act of 2008 was passed to help homeowners on the brink of foreclosure keep their home. But there is a lot more in the bill than just that.

To help offset its cost, the Housing and Economic Recovery Act of 2008 has put some new limitations on the exclusion of gain from sale of principal residence. The 2 out of 5 years rule is still in place (so are the $250K/$500K limits), but a home seller will no longer be able to exclude the portion of the gain for the periods the property is not used as the primary residence after Jan 1, 2009. There will be 3 exceptions: -the period between the last date the property was used as the primary residence and the sale date -the periods the home seller was serving on qualified official extended duty (up to 10 years) -the periods of temporary absence due to change of employment or health conditions (up to 2 years).

Extract of The Housing and Economic Recovery Act of 2008

SEC. 3092. GAIN FROM SALE OF PRINCIPAL RESIDENCE ALLOCATED TO NONQUALIFIED USE NOT EXCLUDED FROM INCOME. (a) IN GENERAL.—Subsection (b) of section 121 of the Internal Revenue Code of 1986 (relating to limitations) is amended by adding at the end the following new paragraph: ‘‘(4) EXCLUSION OF GAIN ALLOCATED TO NONQUALIFIED USE.— ‘‘(A) IN GENERAL.—Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use. ‘‘(B) GAIN ALLOCATED TO PERIODS OF NONQUALIFIED USE.—For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which— ‘‘(i) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to ‘‘(ii) the period such property was owned by the taxpayer. ‘‘(C) PERIOD OF NONQUALIFIED USE.—For purposes of this paragraph— ‘‘(i) IN GENERAL.—The term ‘period of nonqualified use’ means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse. ‘‘(ii) EXCEPTIONS.—The term ‘period of nonqualified use’ does not include— ‘‘(I) any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse, ‘‘(II) any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified official extended duty (as defined in subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and ‘‘(III) any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary. ‘‘(D) COORDINATION WITH RECOGNITION OF GAIN ATTRIBUTABLE TO DEPRECIATION.—For purposes of this paragraph— ‘‘(i) subparagraph (A) shall be applied after the application of subsection (d)(6), and ‘‘(ii) subparagraph (B) shall be applied without regard to any gain to which subsection (d)(6) applies.’’. (b) EFFECTIVE DATE.—The amendment made by this section shall apply to sales and exchanges after December 31, 2008.

Extract of IRS section 121. Exclusion of gain from sale of principal residence (as of Jan 2, 2006)

(a) Exclusion Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. (b) Limitations (1) In general The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000. (2) Special rules for joint returns In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property— (A) $500,000 Limitation for certain joint returns Paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if— (i) either spouse meets the ownership requirements of subsection (a) with respect to such property; (ii) both spouses meet the use requirements of subsection (a) with respect to such property; and (iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3). (B) Other joint returns If such spouses do not meet the requirements of subparagraph (A), the limitation under paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property. (3) Application to only 1 sale or exchange every 2 years (A) In general Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied. (B) Pre-May 7, 1997, sales not taken into account Subparagraph (A) shall be applied without regard to any sale or exchange before May 7, 1997