BUFFALO, N.Y. -- Stuart Lazar, an associate professor in the
University at Buffalo Law School concentrating in tax law, has
expertise and insight into the new American nightmare: losing your
home. Before he became a professor, Lazar was a tax lawyer
representing both individuals and businesses in the tax planning
process. Lazar -- a homeowner and an investor in residential real
estate -- believes that failures in the housing market triggered
the overall financial crisis; and that the general economy will
never recover unless the downward spiral in real estate prices
"None of the attempted solutions passed by Congress and the Bush
administration has solved the problem," says Lazar. "And, in my
opinion, none will until we deal with the housing problem. The
government's attempts to address this portion of our financial
difficulties have been, at best, modest. Whether they have any
significant effect on the problem remains to be seen."
UB: You've stated your strong belief that the current
national financial crisis all began with a failure in the housing
market. Can you elaborate on what you mean.
LAZAR: The current financial mess that we find ourselves
in has its origins in an asset price bubble -- an increase in
housing prices -- fueled by heavily leveraged loans in which
borrowers put little or no money down to purchase real estate that
they could not realistically afford; the creation of new kinds of
financial innovations (such as mortgage-backed securities) that
masked the true risk in the market; lenders that made loans without
income verification (so-called "liar loans"); regulators who failed
to regulate the banking industry, and a Congress that encouraged
irresponsible lending (through the Community Reinvestment Act).
All of the above factors have contributed to real estate markets
that have become artificially inflated -- especially the housing
market, as home prices across the country increased each year.
Prices rose faster than the fundamentals would have suggested --
out of line with increases in household income and significantly
above the rate of inflation. Typical of asset bubbles, there was an
expectation of future price increases. This led to further price
increases as individuals saw real estate as a no-risk investment.
It also led to situations where individuals would borrow against
these price increases in the form of refinancings and home equity
UB: Sounds like a problem waiting to happen?
LAZAR: It was. An asset bubble is like a Ponzi scheme.
Homeowners purchased or borrowed against their homes with the
expectation that a future group of buyers would pay increasingly
rising prices. When the economy began to slow, and prices stopped
rising, new buyers were not there waiting to bail the existing
homeowners out. Those who could not afford to pay mortgages that
they never should have received in the first place began to
default. This led to the beginning of a decrease in housing prices,
which affected additional homeowners, leading to the current
UB: So, who is to blame?
LAZAR: Everybody. Borrowers who shouldn't have borrowed.
Lenders who should not have lent. Regulators asleep at the switch.
And legislators who allowed the crisis to occur, and had no plan to
stop the crisis. Many people recognized that a bubble was being
created, but no one acted to prevent it. The slower economy acted
as the pin to puncture the bubble.
UB: As a tax lawyer, do you believe that the solution is
found in our tax laws?
LAZAR: There isn't any one solution. However, Congress
has attempted to use the tax laws to try to stimulate the housing
market and help existing homeowners.
LAZAR: A couple of measures have been passed recently.
One allows first-time home buyers a refundable tax credit equal to
the lesser of $7,500 or 10 percent of the purchase price of a
principal residence. The credit is available for qualifying
purchases made between April 9, 2008, and July 1, 2009. For these
purposes, a first-time home buyer is defined as a buyer who has not
owned a principal residence during the three-year period prior to
the purchase. For married taxpayers, the homeownership history of
both spouses is examined. Only if neither spouse has owned a
principal residence during such three-year period will the parties
qualify for the credit. Ownership of a vacation home or rental
property not used as a principal residence does not disqualify a
taxpayer for the credit.
The term "tax credit" is misleading, however, since it is
required to be repaid. Home buyers will be required to repay the
credit, without interest, over a 15-year period (at a rate of $500
per year) or earlier, if they sell the house (to the extent of any
profit upon sale). Repayment does not begin until two years after
the credit is claimed -- so if the credit is claimed on a
taxpayer's 2008 tax return, repayment begins on the taxpayer's 2010
tax return. When the home is sold, any credit not previously repaid
must be repaid from the profit on the sale. If there is
insufficient profit, the remaining credit amount would be forgiven.
Since the credit is required to be repaid, taxpayers may think of
this incentive more like a zero-interest loan than a traditional
In essence, Congress believes that fronting money to first-time
home buyers will bring more buyers into the market. More buyers
should lead to increased demand. Theoretically, this increased
demand should help to increase -- or, at the very least, stabilize
-- home prices.
UB: How can eligible taxpayers claim the tax credit?
LAZAR: Taxpayers that qualify claim the credit on their
federal income tax returns. And the credit is refundable -- meaning
that taxpayers owing less than $7,500 in federal taxes will be
entitled to a tax refund for the difference. Taxpayers that qualify
for the credit as a result of a home purchase in 2009 can
accelerate the credit by treating the purchase as occurring in
2008, and by claiming the credit against their 2008 tax liability.
This gives taxpayers the ability to determine when the credit would
yield a larger benefit.
UB: Are there any limitations on taking the tax
LAZAR: There are, both in terms of the amount of the
credit and which taxpayers can qualify. First, the full amount of
the credit is available to single or head-of-household taxpayers
with a modified adjusted gross income of no more than $75,000, and
married taxpayers with a modified adjusted gross income of less
than $150,000. The credit is phased out by $375 for each $1,000 by
which the taxpayer's modified adjusted gross income exceeds such
limits. As a result of this limitation, single or head-of-household
taxpayers with a modified adjusted gross income of $95,000 and
above, and married taxpayers with a modified adjusted gross income
over $170,000, are not entitled to any tax credit. Second, the
credit is limited to 10 percent of the qualified purchase price.
Taxpayers that purchase a home for less than $75,000 will be
limited by this percentage limitation.
UB: The first-time buyer credit helps buyers. What about
LAZAR: Two new tax provisions help existing
As a general rule, debt that is forgiven or canceled by a lender
must be included in income on a taxpayer's tax return. However, the
Mortgage Forgiveness Debt Relief Act of 2007 has a provision that
allows taxpayers to exclude from income amounts realized as a
result of modification of the terms of a mortgage or a foreclosure
on a principal residence. The act only applies to debt taken out to
purchase or construct a principal residence, not to home equity
debt. The intent of the act is to help those taxpayers who have
lost their home, or to help those taxpayers able to renegotiate
with their lender in order to keep an existing home. Combined with
another bill passed in 2008, mortgage debt forgiven from 2007 until
2012 will be excluded from income.
Second, as a general rule, state and local property taxes are
only deductible when taxpayers itemize their tax deductions.
However, beginning with the 2008 tax year, a new standard deduction
of $500 ($1,000 for married taxpayers filing jointly) will be
available for these taxes.
UB: OK, Professor Lazar, is there anything that taxpayers
need to know about these new provisions?
LAZAR: As with all tax provisions, there are limitations
and exceptions to the rules stated above. Taxpayers wishing to
learn more about these provisions should consult their own tax
advisers or may receive additional information at the IRS Web site
UB: So, will these tax provisions "fix" the housing
LAZAR: In my opinion, not by a long shot. These
provisions will make a difference for some taxpayers, but more work
needs to be done. Congress needs to provide further incentives for
home buyers and investors, and find a way to get banks lending
again. In addition, much more is needed to help existing
Remember, that even with foreclosure rates at these historically
high levels, and even more taxpayers going into default on a daily
basis, approximately 95 percent of all mortgagees continue to make
their mortgage payments on time. For government action to have any
significant effect, Congress will need to provide a stimulus to
incentivize these responsible citizens to continue to carry out
their contractual obligations with their lenders. That, however, is
an entirely different conversation.
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