Law Lets Home Builders Recoup Losses with More Back Taxes
President Obama didn't just extend the the homebuyer tax credit's deadline when he signed the Worker, Homeownership and Business Act of 2009. He extended the credit to repeat buyers and also allowed corporations to recoup certain losses through back taxes.
A report Friday from John Burns Real Estate Consulting advised builders and lenders to staff for higher construction and sales volume than originally planned when selling move-up or move-down homes. The new law allows a tax credit up to $6,500 for move-up buyers that owned and resided in a home for at least five consecutive years of the eight years before the purchase.
The first-time homebuyer tax credit originally scheduled to expire on Dec. 1, 2009, HR 3548 allows first-time buyers to claim 10% of the purchase price of their home, up to $8,000 for single or married taxpayers filing jointly, if they close on the purchase by midnight June 30, 2010. Taxpayers must purchase or be locked into a contract to close before midnight on April 30, 2010.
Some investment banks, however, have reported that the extension could only delay the inevitable. Analysts at the Royal Bank of Scotland said that the housing demand propped up by the tax credit may only delay its fall.
“We don’t believe this is enough money to stimulate more purchases, but it is enough money to get buyers who have been sitting on the fence to get off the fence," John Burns Real Estate Consulting said in the report. "Active adult builders are likely to be the big beneficiary.”
Individuals aren't the only ones benefiting from the Act, which includes a provision for business to recoup certain losses through a tax refund.
Depending on the corporate structure, some institutions can receive a tax refund for selling real estate assets at a loss, according to the John Burns report. Current law usually allows company to recoup taxes over the last two years, but the new Act allows companies to get back taxes from 2003, according to the report.
Known as net operating loss (NOL) carrybacks, the law lets a company that made money and paid taxes on those profits in a past year obtain a tax refund if the company loses money in another year. While the law applies to all US businesses, real estate lawyer Chris Hunter, of the San Francisco bay area law firm Morgan Miller Blair, told HousingWire it’s most applicable to home builders.
“Builders are selling projects at a loss and using that to offset taxes paid in previous year,” Hunter said. "Builders take the tax credit and use it to fund another project in a more desirable, stronger-recovering market.”
There’s a short window for the extended NOL carryback, Hunter added. Businesses selling at a loss must complete the deals before the end of their fiscal year, usually the end of the calendar year.
“Everyone is scrambling and trying to make sure their deals close by Dec. 31,” he said.
The majority of the deals Hunter is working on involved parcels of undeveloped land. Deals are less likely to be done for developed land with completed or semi-constructed homes because of additional insurance and liability concerns.
“The deals that will ultimately close will be land deals between investors with a long-term horizon, which frees up cash for home builders to work on projects where the markets are better,” Hunter said.
Write to Jon Prior.
Austin Kilgore contributed to this report.
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