The ‘fiscal cliff’ legislation, close to a total win for homeowners and sellers, revived 2 key tax benefits for housing that had expired more than a year ago.
By Kenneth R. Harney
January 13, 2013
Here’s a quick tally sheet on what the new legislation could mean for you as a buyer, seller or owner.
• Do you, like millions of Americans, pay mortgage insurance premiums or guarantee fees on an FHA, VA, Fannie Mae, Freddie Mac or Rural Housing loan? The American Taxpayer Relief Act — the fiscal cliff compromise bill — allows you to write off the insurance premiums you paid during 2012 along with your mortgage interest, provided your household income does not exceed $110,000. Legal authorization for this deduction expired at the end of 2011. But the new bill retroactively permits write-offs for 2012 and 2013 for qualified borrowers.
• Did you do some energy efficiency renovations in your home during 2012, installing insulation, energy-saving windows, doors, roofing material, non-solar water heaters and the like? Maybe you’re thinking about doing a little green rehab in 2013? For either year, you may be able to claim up to a $500 tax credit thanks to the revival of a home energy improvement incentive that lapsed in 2011. Five hundred bucks may not sound huge, but remember: It’s a credit, not a deduction, so it means $500 off the bottom line of your federal tax return.
• Are you planning a short sale of your underwater home this year or hoping to receive a principal reduction on your loan as a result of a mortgage modification by your lender? The new legislation reauthorized the Mortgage Forgiveness Debt Relief Act that had been scheduled to terminate Dec. 31, and spares you potentially punitive federal taxes on the amount forgiven. Had the debt relief exception in the tax code not been renewed, large numbers of underwater owners participating in short sales — in which banks agree to accept less than the full amounts owed on a loan as part of a sale to a new buyer or investor — would have faced taxation on the full amount forgiven, as if it were regular income.
Lenders and real estate brokers say thousands of financially distressed homeowners would have been devastated by the expiration. Alexis Eldorrado, a Chicago-area real estate specialist in short sales, says she has five clients who are underwater on their mortgages by an average of $100,000 and awaiting short sale closings in the coming weeks. They probably would have had to file for bankruptcy had Congress not renewed the debt forgiveness law, she said, because none of them could afford to pay taxes on $100,000 they never actually received.
What’s in the legislation that some buyers or sellers might not like? Start with steeper capital gains taxes for high-income sellers with big gains that exceed current federal exclusion limits of $250,000 (single tax filers) and $500,000 (married joint filers). Say you are single and earn more than $400,000, or you’re married, file jointly and earn more than $450,000. Under the new legislation, you can expect to pay 20% on capital gains. So if you sell your principal residence this year and your gain on the sale is $750,000, the capital gains tax rate on the amount in excess of the exclusion limit will be 20%, rather than 15%. Sellers below the income thresholds will still pay capital gains taxes at 15%, and earners at the two lowest tax brackets will pay nothing on capital gains.
Another negative: The fiscal cliff deal limits deductions for mortgage interest, property taxes, charitable donations and other write-offs for single-filing taxpayers with adjusted gross incomes above $250,000 and married joint filers above $300,000. The formula it uses is complex, but it could amount to about $1,000 in additional tax liability for a couple with an income around $400,000, according to housing industry estimates.
All in all, not so bad. Then again, major tax reform efforts are coming this spring, with mortgage interest and other real estate write-offs prominent among the targets. So enjoy the fiscal cliff bill results — at least for a little while.