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.
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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.)
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