Housing industry skates through cliff deal
FYI from the desk of Angel Calzadilla:
Housing Industry Skates Through Cliff Deal
The fiscal cliff bill largely kept the mortgage-interest tax break in place.
The housing market and the housing industry have escaped a potential blow on several fronts now that lawmakers have at least partially resolved Washingtonâ€™s â€œfiscal cliffâ€ budget morass.
A bill passed by Congress on Tuesday to pull the n...ation back from the brink of end-of-year tax hikes and spending cuts contains several provisions that are favorable to housing.
Chief among them is one that provides an additional year of relief for troubled homeowners selling their properties. Without action by Congress, those homeowners would have faced big tax bills if they completed â€œshort salesâ€â€”those in which the lender agrees to allow the borrower to sell the home for less than the outstanding mortgage amount.
In the past, forgiven debt has typically been considered taxable income. But in 2007, Congress exempted homeowners from treating some forgiven mortgage debt that way as part of an effort to encourage alternatives to foreclosure.
An extension of the tax break is positive for home values by reducing the number of foreclosures and helping more troubled borrowers stay in their homes, which means less supply on the market.
Another move that should benefit some homeowners is the restoration of a tax deduction for mortgage-insurance premiums, including premiums paid to the Federal Housing Administration and private mortgage insurers alike. That deduction had been absent for a year after expiring at the end of 2011. In 2009, 3.6 million taxpayers claimed this deduction, according to the National Association of Home Builders.
This is a meaningful win for the housing lobby generally and, more specifically, the mortgage insurance industry.
The housing industry also dodged a bullet on a big issueâ€”potential limits on itemized deductions, including the cherished mortgage-interest tax break. Last year, there was talk among politicians in both parties of capping those deductions at a particular level, and Republican presidential candidate Mitt Romney suggested several options, ranging from $17,000 to $50,000. But those limits did not come to pass as part of the fiscal cliff deal.
The pact does restore some limits on deductions that had been in place in the 1990s. But they apply only for individuals earning above $250,000 per year and couples earning above $300,000.
These limits reduce how much high-income taxpayers can claim for mortgage interest and other deductions. For example, a couple with a combined income of $350,000 would see their total itemized deductions fall by $1,500. That results from a formula that reduces the amount that can be deducted by 3% of the difference between the taxpayerâ€™s income and the deduction cap. (In this case, $1,500 is 3% of the $50,000 difference between $300,000 and $350,000.)
However, analysts still believe the mortgage-interest deduction could be altered as Congress continues to look for ways to save money. While the mortgage interest deduction avoided a direct hit this time around, we doubt it willâ€¦dodge Congressional scrutiny going forward.
Angel Calzadilla, Real Estate consultant
Charles Rutenberg Realty