Fiscal Cliff Details Are Positive for Housing

The final “fiscal cliff” details were approved on January 1, delivering good news for the housing market. One of the more watched provisions of the fiscal cliff was the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on Dec. 31, 2012. Upon the approval, homeowners who experience a debt relief on loan modifications, short sales or foreclosures are exempt from being taxed on the forgiven amount. The Act extends up to $2 million of debt forgiveness on the homeowner’s principal residence and will be in effect until January 1, 2014. For homeowners to qualify, their debt must have been used to 'buy, build, or substantially improve' their principal residence and be secured by that residence. The extension is positive news for housing market because it reduces the number of foreclosures by assisting distressed homeowners with maintaining possession of their property. If the tax break was not approved, many feared the borrowers would not agree to a short sale in fear of owing the IRS an outstanding tax bill.

The American Taxpayer Relief Act of 2012, which allowed for the deductibility of mortgage insurance premiums, now applies to years 2012 and 2013. The "fiscal cliff" deal also allows borrowers to deduct the amount they pay for private mortgage insurance, which has become increasingly prevalent in today's tighter mortgage market. The law dictates that eligible borrowers who itemize their federal tax returns and have an adjusted gross income (AGI) of less than $100,000 per year can deduct 100% of their annual mortgage insurance premiums. Certain borrowers with AGIs above $100,000 may benefit from the deductibility as well but are subject to a sliding scale. The tax break covers private mortgage insurance as well as mortgage insurance provided by the FHA, the VA, and the Rural Housing Service.

An additional housing victory is a provision to increase capital gains tax rate from 15% to 20% for individuals who earn more than $400,000. The gains of more than $250,000 for individuals ($500k for households) are subject to taxes on the excess portion of capital gains. For example, in order for an individual homeowner to be impacted by the increased capital gains tax rate they would need to have an adjusted gross income above $400,000 and gain more than $250,000 from the sale of the property. Since this exclusion threshold remained intact, the impact of the capital gains tax increase is limited.

The National Association of Realotrs® issued a brief synopsis of the real estate provisions in the Fiscal Cliff Bill. Attached please find the details.