Homeowner Tax Breaks Survive Fiscal Cliff

Two of the tax breaks that were considered by many to bernimportant to the continued resurgence of the housing markets survived the lastrnminute chaos of the so-called Fiscal Cliff.  rnThe mortgage interest deduction was thought to be on the chopping blockrnas Congress and the President looked for ways to cut the deficit and a secondrntax break affecting foreclosed homeowners and those who participated in shortrnsales was due to expire on December 31.    </p

The mortgage interest deduction allows homeowners torndeduct the interest on both their primary homes and an additional residencernwhich can include a vacation home or even a boat.  Deductions are also available for interest onrnhome equity loans and the deduction extends to premiums on private mortgagerninsurance (PMI).   </p

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

The mortgage interest deduction is thought to cost thernTreasury between $70 and $100 billion per year although most tax experts sayrnfew eligible homeowners actually take advantage of them as they do not itemizerntheir returns.  Both during the FiscalrnCliff negotiations and the presidential election various suggestions were madernfor limiting the deduction such as further reducing the eligibility criteriarneither by homeowner income or the size of the loan.  A variation would put a cap on the amountrntaxpayers could deduct across the board for expenses including interestrndeductions, child care and state and local taxes.  Housing groups fought hard for retention ofrnthe mortgage interest deduction saying it was essential to the recovery of thernhousing market.  In the end Congress didrnnot touch any of these deductions.</p

The second housing related tax break preserved in the midnight negotiationsrnwas a prohibition on taxing forgiven debt. rnThis was a temporary provision enacted several years ago in response tornthe on-going foreclosure epidemic and was due to expire on December 31.  Under previous tax rules creditors werernrequired to report forgiven debt to the IRS. rnThis would include the unpaid mortgage balance when a short sale isrnapproved or any deficiency resulting from a foreclosure sale.  The debt is then taxable as ordinary incomernwhich critics claim discourages homeowners from considering short sales andrnincreases the hardship imposed by foreclosure.   </p

The MortgagernInsurance Companies of American (MICA) which represents private mortgagerninsurers released the following statement in response to the preservation ofrnthe PMI deduction.  </p

“MICArnmember companies are pleased that Congress has taken the necessary stepsrnto enact legislation that preservesrnthe tax deductibility ofrnpremiumsrnfor U.S.rnhomeowners,” saidrnTeresa Bryce Bazemore,rnPresident of the Mortgage Insurance Companies ofrnAmerica (MICA).  “This positiverndevelopment will sustain homernaffordabilityrnfor low- and moderate- incomernhomebuyers who are assistedrnby privaterncapital, in the form of private mortgage insurance. Thisrnpreservation ofrntax policy parity is essentialrnfor the continued recovery ofrnthe residential housing market.”

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