Two of the tax breaks that were considered by many to be important to the continued resurgence of the housing markets survived the last minute chaos of the so-called Fiscal Cliff.   The mortgage interest deduction was thought to be on the chopping block as Congress and the President looked for ways to cut the deficit and a second tax break affecting foreclosed homeowners and those who participated in short sales was due to expire on December 31.    

The mortgage interest deduction allows homeowners to deduct the interest on both their primary homes and an additional residence which can include a vacation home or even a boat.  Deductions are also available for interest on home equity loans and the deduction extends to premiums on private mortgage insurance (PMI).   

There are limitations on these deductions.  According to the IRS, single taxpayers can deduct the interest on the first $500,000 of first mortgage debt and joint filers the first $1 million. Home equity deductions are limited to interest on loans of $50,000 and $100,000 for single and joint filers.  The deduction for PMI is available to taxpayers with adjusted gross incomes under $100,000. 

The mortgage interest deduction is thought to cost the Treasury between $70 and $100 billion per year although most tax experts say few eligible homeowners actually take advantage of them as they do not itemize their returns.  Both during the Fiscal Cliff negotiations and the presidential election various suggestions were made for limiting the deduction such as further reducing the eligibility criteria either by homeowner income or the size of the loan.  A variation would put a cap on the amount taxpayers could deduct across the board for expenses including interest deductions, child care and state and local taxes.  Housing groups fought hard for retention of the mortgage interest deduction saying it was essential to the recovery of the housing market.  In the end Congress did not touch any of these deductions.

The second housing related tax break preserved in the midnight negotiations was a prohibition on taxing forgiven debt.  This was a temporary provision enacted several years ago in response to the on-going foreclosure epidemic and was due to expire on December 31.  Under previous tax rules creditors were required to report forgiven debt to the IRS.  This would include the unpaid mortgage balance when a short sale is approved or any deficiency resulting from a foreclosure sale.  The debt is then taxable as ordinary income which critics claim discourages homeowners from considering short sales and increases the hardship imposed by foreclosure.   

The Mortgage Insurance Companies of American (MICA) which represents private mortgage insurers released the following statement in response to the preservation of the PMI deduction. 

"MICA member companies are pleased that Congress has taken the necessary steps to enact legislation that preserves the tax deductibility of premiums for U.S. homeowners," said Teresa Bryce Bazemore, President of the Mortgage Insurance Companies of America (MICA).  "This positive development will sustain home affordability for low- and moderate- income homebuyers who are assisted by private capital, in the form of private mortgage insurance. This preservation of tax policy parity is essential for the continued recovery of the residential housing market."