Ken Harney — New life for tax credit?

Will Congress extend the wildly popular $8,000 homebuyer tax credit beyond its Dec. 1 expiration date?

That’s a question generating huge pressure on Capitol Hill, from would-be buyers who haven’t found the right house to realty agents, builders, lenders and squads of lobbyists working on their behalf.

But here’s the first hint of an answer: On Sept. 17, the leadership of Congress’ primary tax legislative committee introduced a tax credit bill that’s likely to zip through the House and move to the Senate rapidly. Charles Rangel, chairman of the House Ways and Means Committee, sponsored the bipartisan Service Members Homeownership Tax Act, which would extend the credit for another 12 months for thousands of military, Foreign Service and intelligence agency personnel who’ve been posted abroad during 2009.

Rangel’s bill, with 29 cosponsors, would keep the credit alive through Nov. 30, 2010, for service members who had at least 90 days of overseas duty assignments during 2009, and who otherwise meet the eligibility tests for the credit. The bill would also prohibit the IRS from ‘recapturing’ the $8,000 credit when service members are forced to sell or rent out their houses because they are deployed to a different duty station, overseas or inside the country.

Under the regular rules of the program, buyers who obtain the credit must use their houses as a principal residence for 36 months or repay the credit to the IRS. As a result of the 36-month rule, many military and diplomatic employees have been hesitant to buy a house and claim the credit, or are worried that their absence could force them to repay the money.

For example, the spouse of a Foreign Service officer posted to the Philippines for a two-year assignment wrote to Rep. Earl Blumenauer, a Democrat from Oregon, to alert him to a flaw in the program. The Oregon couple bought their first home earlier this year. But having now been posted abroad, they cannot claim to occupy the house as their principal residence. Under current rules, they even face recapture of the full credit.

Blumenauer said ‘it is absurd that thousands of Americans serving our country, away from friends and family, must choose between their service work and homeownership.’

Though nothing is guaranteed on Capitol Hill, legislation eliminating tax penalties on the military during wartime looks like a good bet for early passage in both houses. Equally significant: It now appears likely that there will be an $8,000 tax credit available a year from now — at least for some purchasers. Which begs the question: Why not leave it in place for all first-time buyers?

There’s growing support for that on both sides of the Capitol, but there are also some complicating issues. In the Senate, the most outspoken advocate has been Senator Johnny Isakson, a Republican from Georgia and a former real estate broker. He wants to extend the credit to Dec. 1, 2010, raise the maximum to $15,000 and make it available to all homebuyers next year.

But recently, key Senate Democrats produced their own version of an extension, limited to six months, retaining the ceiling at $8,000 and targeting only first-time purchasers.

In a statement, Senator Benjamin Cardin, a Democrat of Maryland and the bill’s primary sponsor (Majority Leader Harry Reid of Nevada and others have also signed on), raised what may prove to be the crucial issue affecting the scope and duration of any credit extension: cost.

‘A six-month extension is a fiscally responsible way to provide adequate time to nudge even more prospective homebuyers off the sidelines,’ he said.

Estimates of the revenue costs of the current credit vary widely, from $3 billion to $8 billion and up. How do you pay for any extension without worsening the budget deficit? The new Rangel bill includes the answer: You raise taxes somewhere else and ‘pay as you go.’

The Rangel bill pays for most of the servicemen’s credit extension by increasing IRS penalties on taxpayers who fail to file partnership or ‘S’ corporation returns. This would raise an estimated $327 million over 10 years. Where and how to raise taxes to cover the far larger cost of a six-month or 12-month extension of the current tax credit could prove much more controversial.

Ken Harney is a real estate columnist for the Washington Post.