Fiscal Cliff Bill a Benefit for Homeowners

Monday, July 10, 2023

The tax law passed by Congress this week to avert the "fiscal cliff" turned out pretty well for the real estate industry.First, the Mortgage Forgiveness Debt Relief Act of 2007, which was scheduled to expire on Dec. 31, 2012, has been extended through the end of 2013.This means that homeowners who experience a debt reduction through mortgage principal forgiveness or a short sale of their principal residence during 2013 may exclude up to $2 million of forgiven debt from their taxable income.Had this law not been extended, income tax would have had to be paid on such forgiven debt -- making short sales and loan modifications less attractive to some distressed homeowners than foreclosure and bankruptcy.

Second, the fiscal cliff deal brings back from the dead the deduction for mortgage insurance premiums. This deduction expired at the end of 2011, but has now been retroactively extended for all of 2012 as well as 2013.Taxpayers with adjusted gross incomes (AGI) of less than $100,000 per year can deduct as an itemized deduction all of their mortgage insurance premiums.The deduction is phased out ratably by 10 percent for each $1,000 by which the taxpayer's AGI exceeds $100,000. Thus, the deduction is unavailable for taxpayers with AGIs over $110,000.The deduction applies to private mortgage insurance premiums as well as mortgage insurance provided by the FHA, the Department of Veterans Affairs, and the Rural Housing Service.

Third, the home mortgage interest deduction (the "MID") was left largely untouched -- for the moment, at least. Some had feared that the MID might be substantially reduced, an option that remains on the table as lawmakers prepare for a broader debate over the shape of the tax code that will take place in coming months.Although the MID is intact for now, many high-income taxpayers will see some reduction in the value of their itemized deductions, including the MID. That's because the fiscal cliff bill brings back the "Pease limitation," which had expired in 2009. This provision reduces a taxpayer's itemized deductions by 3 percent of the amount his or her AGI exceeds a threshold amount.Under the new law, the Pease thresholds are $300,000 for married taxpayers filing jointly, and $250,000 for single taxpayers.

So a married couple with an AGI of $400,000 and $50,000 in itemized deductions (including home mortgage interest), would be $100,000 over the threshold. Because 3 percent of $100,000 equals $3,000, the couple's itemized deductions would be reduced from $50,000 to $47,000. The couple end up with $3,000 more in taxable income, which at their income level is taxed at a 33 percent rate. They end up paying $999 in extra taxes.

No matter how high a taxpayer's AGI, the Pease reduction cannot exceed 80 percent of the amount of itemized deductions otherwise allowable for the year.But this still means that a very high-income homeowner could still lose up to 80 percent of his or her itemized deductions for home mortgage interest, state and local income and property taxes, and charitable contributions.Finally, in a boon to all homeowners, the $500 credit for various energy-saving improvements to a principal residence has been reinstated -- it had expired at the end of 2011. The fiscal cliff law brings it back for 2012 and 2013.

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Estella said
"That is a beautiful shot with very good lighting ." about Women Consider Owning a Home to be a Vital Component of the American Dream
on Sunday, May 12, 2013 @ 9:57 AM

Chris White - Team Leader said
"Unfortunately you are not alone. It's more than an outcry. The powers that be really need to come down harder on Bofa than they already are. Working on these short sale for over 2 years now I've uncovered down right fraud happening on the lenders parts. If they cared more about moving this country forward than protecting their own wallets then they would cut the red tape and approve these short sales in a timely manner. Our team made the wise decision to get BofA loans which were FHA or Freddie Mac backed, approved prior to listing on the market. Then we can list the home as "Price Approved" and close in 30 days. In this instance BofA does a full appraisal, rather than an incompetent "Broker Price Opinion" (nothing against agents but they have no idea how to make adjustments on comparable homes) and then the bank issues an "Approval To Participate" letter which dictates what price we can go on the market and take anything north of 88%. I really do hope your situation improves. " about Congressional Bill to Speed Up Short Sales
on Tuesday, August 30, 2011 @ 9:15 AM

Lisa Zeiner said
"We made an offer 4 months ago to BofA, and have heard nothing. It was a cash offer which is better than the zero money they are collecting now. And since the people don't care they are trashing the place, by the time BofA gets around to it our offer will be gone as the place is a mess!! Septic issues now, garbage being dumnped. All of this could have been avoided if BofA really wanted to correct their cash flow problem and sell these properties in a timely manner. They cry about cash but then do nothing intelligent to fix the problem" about Congressional Bill to Speed Up Short Sales
on Tuesday, August 30, 2011 @ 9:06 AM

Jones Ramirez said
"Thank you for the work you have done into this post, it helps clear up a few questions I had." about How do appraiser’s determine a homes value?
on Tuesday, April 19, 2011 @ 10:07 PM

HollyRobsonf said
"Hey - I am certainly happy to find this. great job!" about Bank of America to Offer Principal Reduction to Underwater Borrowers
on Wednesday, April 13, 2011 @ 6:45 PM