The fiscal cliff deal and real estate — what’s up

So Congress sorta kinda reached a deal to avert the “fiscal cliff” — well, at least for a year. Pick your favorite reliable news source to read how it affects most things; we’re just going to look at real estate issues here.

There are some provisions of the bill that affect real estate specifically, and others that affect tax deductions in general (including the mortgage interest deduction). Here are the most notable.

Real-estate specific things:

1 Someone who has had part of his mortgage principal reduced — e.g., by a short sale or loan modification — will not have to pay taxes on that reduction… at least if it happens before January 1, 2014, when that provision will expire.

2. Homeowners who earn less than $110,000 annually can continue to deduct any mortgage insurance premiums through 2013; it was also made retroactive for 2012.

General things that may affect real estate for the very wealthy:

1. If you earn more than $250,000 ($300,000 for couples), you have a limit on the total value of your tax deductions — that includes the mortgage interest deduction.

  • The more you earn over $250,000, the less you can take in itemized deductions.
    • If you earned $251,000, for example, you would reduce your itemization by $30.
    • If you earned $300,000, you would reduce your itemization by $1,500.
    • If you earned $500,000, you would reduce your itemization by $7,500.

So it’s noticeable for the very wealthy, but not earth shaking.

(These limits aren’t actually new. They were originally put into place during the first Bush administration back in 1990, but were phased out starting in 2001.)

2. Capital gains that put you above $400,000 in income will now be taxed at 20% instead of just 15%, except for the sale of your principal residence. That’s still exempt — at least up to $250,000 in profit ($500,000 for couples).

3. You can leave your estate of up to $5 million ($10 million for families) to your kids, and they won’t pay any tax. Anything you leave above that $5/$10 million, though, will be taxed at 40%.

The good folks at NAR have a pretty good explanation of it all. Click here to check it out.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
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One Response to The fiscal cliff deal and real estate — what’s up

  1. The “fiscal cliff bill” passed by Congress January 1 included a provision to exclude borrowers from paying taxes on debt forgiven through a short sale, foreclosure, or loan modification. Known as Mortgage Debt Relief Act of 2007, the act was scheduled to expire December 31, 2012, but received an extension for another year.

    This can be viewed as both a positive and a negative depending on how you would like to spin it. I believe it is a nice hand out from the government that will allow distressed homeowners that are still stuck in various underwater properties a way out. Doing nothing about an underwater property and hoping that the market will come back and save you is not the answer. In my opinion, the best path to a permanent solution is a Short Sale with debt mitigation provided by legal counsel. This allows you to get rid of the property and remove any and all personal liability related to the mortgage debt and associated costs. This is my opinion of the positive view as it relates to the individual tax payer staying productive versus ending up as a future bankruptcy candidate.

    The negative side of the equation really relates to the macro picture for the economy. If Congress did not extend the debt relief then there would be a significant deterrent for people to make a decision thereby preventing more underwater or distressed properties from coming on the market. This would theoretically support a healthier real estate market but the underlying problem of approximately 30% of home owners with mortgages being underwater would still remain.

    To read more…visit my blog at http://www.jeffersonmortgage.com/blog/414/short-sales/fiscal-cliff-patch-debt-relief-congress-recognizes-we-still-have-legacy-issues-related-to-housing

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