Federal Debt Foregiveness Act Extended by Fiscal Cliff Tax Deal

The fiscal cliff tax legislation passed a view days ago did include a couple of things positively affecting real estate. The Debt Forgiveness Act of 2007 was extended for another year, so homeowners lucky enough to secure a loan modification which included principal reduction, a short-sale or an underwater deed-in-lieu transaction won’t find the tax man looking for a non-existent cut of the “gift” from lender to borrower. As the short-sale issue is likely to be with us for years to come, the break should probably be permanently extended.

California still needs to extend their debt foregiveness act.

Private Mortgage Insurance is once again tax-deductible, which is a good thing since the cost of insuring loans with less than a 20% equity stake has risen considerably. More increases, notably in the FHA program, can be expected as 2013 rolls forward. Deductibility for MI premiums had been an on-again, off-again concept the past couple of years and still has not been made permanent.

The mortgage interest deduction remained untouched, for now. At some point, it is reasonable to expect that changes will come to the present $1 million limit in some form or another.

Other key components of the new legislation include:

1) Income Tax Rates: Extends the historically established tax cuts on incomes up to $400,000 for individuals, $450,000 for married tax filers. Households earning higher amounts will be taxed at a rate of 39.6 percent, up from the current 35 percent. The Mortgage Debt Foreclosure Act Extension keeps caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000. Homeowner Bush tax cuts are saved in tact

2) Homeowners Estate Taxes: Estates will be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, similar estates had to pay a top rate of 35 percent.

3) Capital Gains & Dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families households filing taxes jointly will increase from 15 percent to 20 percent.

4) Alternative Minimum Tax: The deal for homeowners is that it permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle income taxpayers from all of a sudden having to pay higher tax bills averaging near $3,000.

As always, consult your own accountant regarding tax matters.