The Housing Assistance Act of 2008, finally passed by both houses of Congress and signed into law by President Bush this week, contains some not-to-pleasant surprises for the unwary taxpayer according to an article by Eva Rosenberg published this week in MarketWatch.

Rosenberg is the founder of TaxMama.Com, and is licensed to argue on behalf of taxpayers before the Internal Revenue Service. She has just written a new e-book entitled "The 100% Home-Based Business Tax Solution."

According to Rosenberg, the bill, which is intended to assist homeowners on the verge of losing their homes, "is likely to cause more upset than calm" for taxpayers.

She outlines several areas where the tax law was changed along with housing law and warns that there are pitfalls with each.

The bill grants a tax credit of up to $7,500 to new homeowners. Eligible recipients are those who have not owned a primary residence for three years (although they may own a vacation property or a time share). The tax credit represents an amount up to 10 percent of the purchase price and couples in commuting marriages can each purchase a home although they have to share the credit.

But the credit is not a gift from the government. It is actually a loan and must be repaid in 15 years, starting the second year after the home purchase. Granted it is an interest free loan but if the home is sold in less than 15 years the balance must be repaid immediately except in the case of the death of the homeowner or with some exceptions for divorce or other emergency situations.

The main downside to this provision is that it will require filing a tax return regardless of the status of the homeowner. The credit is added to any refund due the taxpayer and loan payments are deducted from refunds or added to the tax obligation. The credit and the obligation to file a refund to collect and repay it could affect seniors living on fixed incomes and Social Security and may require using a professional tax preparation service. Taxpayers who neglect repaying the "loan" will be subject to all of the usual IRS penalties for non-filing and non-payment.

There is also a change in the standard deduction for real property taxes. Couples may now deduct taxes up to $1,000 ($500 for singles) for "qualified" taxes, i.e. those that could have been deducted on Schedule A by those taxpayers who can itemize. This provision is intended to help those who cannot itemize, but if the deduction is taken based on the tax credit it can not be claimed on Schedule C, the home/office provision or any other schedule. Rosenberg does not specify whether the taxpayer can pick where to apply the deduction.

Owners of vacation homes or investment property are about to lose that juicy capital-gains exclusion when they sell the second home. For the last eight or nine years there has been a game where owners moved from principal residence to investment or recreation property to new personal residence to satisfy the requirements to qualify for the $250,000 ($500,000 for couples) exclusion of sale profits. Under the new law taxes will be levied on sale proceeds of second homes based on the number of days the house was not a qualified personal residence. Any gain resulting from appreciation on the property after May 6, 1997 will be taxed as ordinary income.

Starting in 2011, merchant banks will be required to send a report to the IRS itemizing income to every merchant account. This includes sales on eBay or from credit or debit card purchases for other goods or services. In the past the IRS had to obtain a subpoena to access this type of information ' now they can conduct an audit at almost any time. This is apparently intended to keep those who apply for the credit honest as eligibility phases out depending on income.

Many of the provisions of the housing rescue bill will not kick in for several years (while the tax credit expires on June 30, 2009) and many others will be refined by IRS regulations and ultimately case law. But anyone who plans to avail themselves of the tax credit or the ability to claim a property tax payment against income taxes should be aware that there are problems that could be costly and should contact a tax professional for assistance.