The recently passed tax bill gives homebuilders a strong boost in the form of tax breaks in the latest example of government aid to industry. This largesse is not really needed, as the industry has passed the critical part of the cycle and is in its best financial shape in years.

IN PICTURES: 10 Insurance Tips For Homeowners

A New Tax Break And Extension Of An Existing One
The first tax break involved expanding rules regarding the use of net operating losses (NOLs) to offset profits in previous years. The original rules passed in the American Recovery and Reinvestment Act of 2009 allowed these NOLs to be applied back up to five years, but they limited this term to small businesses. Now, businesses of any size can use the NOLs. This will lead to cash refunds on taxes paid in previous profitable years for many homebuilders.

The new law also extends and expands the homebuyer tax credit that was due to expire November 30. The tax credit, up to $8,000 for eligible new homebuyers, now includes homes on which contracts are signed before April 30, 2010 and which close by June 30, 2010.

If that wasn't enough of a plum for the homebuilders, the tax credit is now extended to include those who own a home, have lived in it for five out of the last eight years, and are buying a new principal residence. This tax credit can be claimed up to $6,500. Also, income limits have been raised for eligibility for the credit, up to $125,000 for individuals and $225,000 for married couples.

Companies Discuss NOL Issue During Conference Calls
During its most recent conference call at the end of October, MDC Holdings (NYSE: MDC) said it had an $86 million NOL at the end of September.

Standard Pacific (NYSE: SPF) also discussed the impact of the NOL extension. During its call, management did not have an exact dollar amount calculated but noted that it paid $160 million in taxes in 2004, part of which might be refunded.

Industry Has Built Up A Sizable Cash Hoard
The irony is that the tax break is not really needed anymore. Most homebuilders have passed the danger point of the cycle's trough by cutting costs, rationalizing land positions and extending the term structure of their debt. The industry has built up a sizable cash hoard as a result of these actions.

Pulte Homes (NYSE: PHM) ended its third quarter with cash of $1.6 billion and estimated that it would end 2009 with $2 billion.

The Ryland Group (NYSE: RYL) ended its quarter with cash and marketable securities of $744 million. Some of this cash is restricted, but the cash almost comes close to its total on balance sheet debt of $856 million.

Uncle Sam's Long Reach
The Federal Government has extended its hand and showered money on another industry, even though it is questionable whether the aid is even needed anymore. Will American industry ever survive without the beneficial hand of the feds?(To learn more, see Why Housing Market Bubbles Pop.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center