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Homeowner Tax Breaks Survive Fiscal Cliff
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
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.
Insurance Companies of American (MICA) which represents private mortgage
insurers released the following statement in response to the preservation of
the PMI deduction.
member companies are pleased that Congress has taken the necessary steps
to enact legislation that preserves
the tax deductibility of
Teresa Bryce Bazemore,
President of the Mortgage Insurance Companies of
America (MICA). "This positive
development will sustain home
for low- and moderate- income
homebuyers who are assisted
capital, in the form of private mortgage insurance. This
tax policy parity is essential
for the continued recovery of
the residential housing market."
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