The Obama stimulus package made some changes to IRS tax rules concerning real estate, home improvements, short sales and foreclosures. If you're a first time home buyer, you'll get either a $7,500 tax credit or a $8,000 tax credit, depending on when you bought your home. In addition, the timing of your home purchase affects whether you have to repay the home tax credit. IRS allows you to continue to take tax deductions for green home improvements and if you had a short sale or foreclosure recently, the money you lost won't be considered income thus saving you tax.

As we move further into tax season, Treasury and IRS employees have been busy filling in the missing pieces on all of the new tax laws that were passed as part of the recent stimulus package.

When it comes to real estate, the rules are at best confusing. Let's shed a little compact fluorescent light on the subject:

2008 $7,500 tax credit vs. 2009 $8,000 tax credit.

If you were a first-time buyer who purchased a home after April 8, 2008 through the end of 2008, you might have realized that you could get a $7,500 tax credit on your 2008 tax return. This is a tax credit, which means that even if you don't pay $7,500 in taxes you'll still get that much in the way of a refund, provided you meet other qualifying details, according to Mark Luscombe, principal analyst for the tax and accounting group at CCH.

However, the 2008 $7,500 tax credit must be paid back in $500 equal installments over 15 years, which means that this tax credit effectively functions as a zero-interest loan. (Luscombe said the fine print in the new law says that if the taxpayer dies, the rest of the payback is forgiven. It's unclear whether both homeowners have to die if the property is owned jointly, or just one of the homeowners.)

If you chose to close on December 31, 2008 rather than January 2, 2009 (perhaps to be able to itemize the interest and points on your 2008 tax return), you may be kicking yourself. The recently signed stimulus bill took the $7,500 tax credit and turned it into an $8,000 tax credit – one that doesn't need to be repaid, Luscombe said.

But there are some wrinkles that require you pay attention. To qualify for the $8,000 tax credit, you must earn less than $150,000 in adjusted gross income for couples filing jointly. Also, you must stay in the house (assuming as your primary residence) for three years or Luscombe says there may be some payback requirement. (He's unclear how the IRS would be able to follow up and some of the regulations and filing requirements aren't fully explained at the moment.)

The $8,000 first-time buyer credit is only good for homes purchased by first-time buyers (or anyone who hasn't owned a home in the last 3 years) from January 1, 2009 through December 1, 2009 – so don't wait to close in December or you'll miss out.

Luscombe said you can elect to take the credit on your 2008 taxes. But if you bought your house in 2009, you'll only be able to get a $7,500 tax credit. If you wait to claim the credit on your 2009 tax return, Luscombe said you'll get the full $8,000.

"I'm not sure if Congress intended it to be written that way, but that's the way they wrote [the law]. It might make some sense because of the way the IRS has its form," Luscombe added.

Going Green? Take a Tax Credit

The stimulus package eased requirements on energy tax credits. The $500 lifetime tax credit for building improvements has been increased to $1,500 for such improvements as the installation of energy-efficient windows, insulation, doors, and mechanical systems.

In addition, you can take a 30 percent tax credit for every dollar you spend on things like solar heaters, fuel cells, and heat pumps, Luscombe explained. The individual limits on particular expenditures has mostly been eliminated.

Foreclosure and Short Sale Forgiveness

For those who are going through foreclosure or a short sale, where the house is selling for less than the amount owed on the mortgage, the forgiven debt will not be taxed as income through 2012.

"Up to $2 million of mortgage debt on the principal residence that has been forgiven can be excluded from income," Luscombe explained. "Taxpayers do not have to put it on their tax form," even if the lender has sent a 1099.

When you're relocating your family for a short, set amount of time should you rent or buy a home?

In my opinion, and in light of the current housing market, I think it may be better to rent. You may not be able to recoup the costs of buying a home in a short time frame. When you're choosing between buying and renting think about where you're moving to and what kind of housing market is there.

Here's what happened to one ThinkGlink reader:

Question: We are looking at a probable transfer from Atlanta to Chicago. Part of the package would include full relocation benefits, because we won't be able to sell our house in Atlanta any time soon.

We would only be in Chicago for about four years. There are a lot of very nice homes for rent in one of the far northwest communities, which would be near where I'd work.

I'm thinking maybe we should rent a home instead of buying one. Would we have a capital gains tax event if we don't buy another home right away? If real estate begins to appreciate again in the next four years, we would miss out on that appreciation. What should we think about when making this decision?

Answer: You wouldn't have to pay capital gains tax on your Atlanta residence as long as you've lived in that home as your primary residence for two of the last five years. If you meet those requirements, you can keep any gains you have in the property up to $500,000 (if you're married, up to $250,000 if you're single) tax-free.

Chicago is a more expensive market than Atlanta, and while the cost in the northwest quadrant might be less than the average price for the metropolitan area, you're right to think about renting. In general, I don't know that four years is enough time to make any money in housing these days, although if you buy the right place at the right price, and fix up the property, you might get lucky and wind up making a little money down the line -- or at least breaking even.

For other first-time buyers weighing whether to rent or buy, the first-time home buyer's tax credit could play a big part in whether your own numbers work out. But these numbers have yet to play out. If Congress passes a significant tax credit for first time buyers and others, buying a home in some situations, with today's low interest rates, may be cheaper if you stay in that home the next several years.

For all buyers making the decision to rent or to buy, it's all about the math. You might find that renting is so cheap right now, that you'll be able to sock away a lot of cash over the next four years than if you use your cash to buy, own and maintain a home. And that might be a very smart move. And for others, the price of housing may have come down sufficiently along with low rates to justify buying over renting, particularly if the federal government gives the buyer a significant tax break.

It's been a busy session for Congress: Last week the Senate approved a $15,000 tax credit for all homeowners, regardless of income. This week, as the House and Senate finish their negotiations, it's been shrunk to an $8,000 tax credit for first-time home buyers who qualify under income guidelines.

That's better than the $7,500 tax credit that was passed last fall. And the way the new stimulus package is written, you won't have to pay the tax credit back in $500 increments over 15 years. In fact, the home buyer would get the $8,000 credit and without a payback requirement.

The world of stimulus, investment, Wall Street and the credit markets is moving so fast, it's tough for a weekly columnist to keep up.

But in this week's version, considered by many to be its final form, the $789 billion stimulus package aims to give taxpayers some additional help by providing a payroll tax credit of $400 for low- and middle-income workers, ($800 for couples), expansion of the child tax credit, expansion of the Earned Income Tax Credit, further relief of the marriage penalty, incentives for buying new cars (including light trucks and SUVs), and relief of the alternative minimum tax (AMT) that would have snared as many as 26 million taxpayers in 2009.

(Will the tax plan change before it's signed? Maybe. Until the Senate and the House vote on the Stimulus Bill and it's signed by the President, anything can change.)

Will it work? That depends on what the problem is that you're trying to fix.

I've long felt that there is both a serious financial component and an emotional component to the current crisis. Fixing the financial failings of Wall Street and Main Street won't necessarily cure the crisis of confidence and trust that lingers.

It isn't just that Americans don't trust the high-paid bankers on Wall Street. It's that they no longer trust themselves to make smart, long-term decisions for their family's future. They are second-guessing the most basic financial moves they've made. Consider three letters that recently arrived in my in-box:

Letter 1: A single mom in California used a 40-year loan to stretch her finances and buy a house for $500,000 that's now worth $350,000. She's paying her bills but wonders whether she's possibly made the dumbest move of her life.

Letter 2: A divorced woman wonders if she made her own dumbest move by asking for the house based on its valuation when she divorced in 2005 -- rather than getting half of her ex-husband's pension. The house is worth 30 percent less -- if she can even sell it.

Letter 3: A husband and father wonders whether he'll ever climb out of the hole his family has fallen into, now that he has lost his job and is on the verge of losing his house to foreclosure. He is contemplating a life of not even qualifying to rent a house in his neighborhood of choice, not because he can't afford it, but because he doesn't know who would want to rent a home to someone with his credit score.

These three individuals, the families they're connected to and the thousands of other Americans who write to me each week are all wondering what money moves they should be making right now. Should they stay in their homes or sell? Should they buy or rent? Should they keep contributing to their 401(k) plans at work, or contribute to a Roth IRA, or keep it in their mattress at home? (I'm not a big fan of stuffing your mattress with money, due to the risk of fire and flood. Safe deposit boxes are better -- you'll be safe even if the bank goes under.)

It's becoming clearer that the mantra on Capitol Hill to "Do something, anything" is the call of people desperate to help, but who are unsure whether the help will actually solve the problem.

A few things are clear: If people have jobs, they'll pay their mortgage, taxes, and other bills. If they don't, they'll choose food and fuel over a mortgage payment or credit card bill every day of the week. If they can't afford to pay for COBRA after being laid off, they won't carry health insurance. And if they get sick, they'll head for the emergency room -- and perhaps after that bankruptcy court.

But with our self-esteem tied up so closely with our net worth, you almost want to see Oprah lead a class on how to reprogram financial trust back into our lives. Because if you don't have faith that the next 10 years in this country will be better than the last, it's a big leap from there to buying a house and sinking roots into a community.

In a tough real estate market, it might seem as though a short sale would make sense.

A short sale is when you sell your home for less than what you owe your mortgage lender. Your mortgage lender agrees to write off the difference in a short sale.

But a short sale still has a negative effect on your credit and can become an issue if you try to buy another home in the near future.

Question: My daughter in California owns a home that is worth less than her mortgage. Should she see if she can do a short sale for her home? If she does this and wants to buy another house closer to us will having a short sale on her credit history hurt her ability to purchase another home?

Answer: A short sale will definitely have a negative impact on her credit and she may not be able to buy another house for a long time. There are some rules in place at the moment that if someone has a short sale or foreclosure on his or her credit, then that person cannot buy a home using a loan that would be sold to Fannie Mae or Freddie Mac for five years. Since many, if not most, residential loans today are sold to Fannie Mae or Freddie Mac, she would probably put herself in a bind with a short sale.

Completing a short sale is no easy task. If your daughter can find someone to buy her house, she will have to get the lender(s) to agree to the short sale.

Although you live in California where real estate attorneys are not generally used to close residential house deals, I always advise hiring your own attorney (which is different from the one hired by the lender) to walk you through a short sale or foreclosure. There are some issues that could come back to bite you if they're not resolved at the closing.

My mother sent this to me this morning. I don't know where it comes from, or who authored it. But, it's a sad (though funny) commentary on the current economic madness that surrounds us. If anyone knows the authorship, please let me know so we can give credit where credit is due.

New Financial Terms

CEO: Chief Embezzlement Officer
CFO: Corporate Fraud Officer
BULL MARKET: A random market movement causing investors to mistake themselves for financial geniuses.
BEAR MARKET: a 6-to-18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.
VALUE INVESTING: The art of buying low and selling lower.
P/E RATIO: The percentage of investors wetting their pants as the market keeps crashing.
BROKER: What my financial planner has made me.
STANDARD & POOR: Your life in a nutshell.
STOCK ANALYST: Idiot who just downgraded your stock.
STOCK SPLIT: When your ex-wife and her lawyer split your assets equally between themselves.
MARKET CORRECTION: The day after you buy stocks.
CASH FLOW: The movement your money makes as it disappears down the toilet.
YAHOO!: What you yell after selling it to some poor sucker for $240 per share.
WINDOWS: What you jump out of when you're the sucker who bought Yahoo at $240 per share. INSTITUTIONAL INVESTOR: Past year investor who's now locked up in a nuthouse.
PROFIT: Archaic word no longer in use.

I would also add:

SEC: Saving Executive Compensation
TARP: Totally Awful Real estate Prices

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If you had purchased $1000 in shares of Delta Airlines one year ago, you would have $49 today. If you had purchased $1000 in shares of AIG one year ago, you would have $33 today.
If you had purchased $1000 in shares of Lehman Brothers one year ago, you would have $0.00 today.

But...if you had purchased $1000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for recycling, you would have received $214.

Based on the above, the best current investment plan is to drink heavily and recycle. It's called the 401-Keg.

Hope you got a kick out of that, too!