Impact of Fiscal Cliff

The New Year is here and with it comes some good news for homeowners all over the nation. Congress finally passed the fiscal bill last week with favorable outcome for the mortgage owners. Let’s evaluate the various tax relief outcomes from the bill.

1. Extension of American Taxpayer Relief Act of 2012
   The American Taxpayer Relief Act of 2012 allows for the deductibility of mortgage insurance premiums and has extended the law that expired at the end of 2011. According to a report from Compass Point Research & Trading, the law now applies to fiscal years 2012 and 2013. The law states that eligible borrowers with an adjusted gross income less than $100,000 and who itemize their federal tax returns can deduct 100% of their annual mortgage insurance premiums.
   Others with gross incomes above $100,000 may also benefit from this, but will be subject to a sliding scale. This tax break covers both private mortgage insurance and those provided by the FHA, the VA and the Rural Housing Service.
2. Extension of the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on Dec. 31.
   The fiscal cliff deal extends this Act for another year, which means that homeowners who are eligible for a debt reduction through mortgage principal forgiveness or a short sale are exempt from being taxed on the forgiven amount for another year. This Act extends up to $2 million of debt forgiveness on a principal residence. To qualify for this, a homeowner should have used the money to buy, build or improve their principal residence.
3. Increase in the capital gains tax rate.
   The government has plans to increase the capital gains tax rate from 15% to 20% for individuals earning more than $400,000. Even though this will be harder on the homeowners, researchers see it as a positive act. Compass Point says that “only gains of more than $250,000 for individuals and $500k for households are subject to taxes on the excess portion of capital gains.” This means that for an individual to be affected by this new rule, they need to have an adjusted gross income above $400,000 and a gain of more than $250,000 from the sale of a property.

All these changes and extensions to the mortgage insurance and interest deductions will cost the government heavily; about $600 billion, to be precise. However, this measure has been taken because it is seen as a much-needed relief for homeowners who have been drowning in debts for years. It is expected that these moves will help the slowly recovering housing market to get stronger, over the course of the New Year.