I’m sure you’ve heard plenty about the “Fiscal Cliff” of expiring tax cuts our economy was due to fall over recently. Now that the negotiating is over and legislation has been passed, it’s time to examine what it all means for us as taxpayers. If you are a homeowner, or considering becoming one in the year to come, read below to find out how these changes affect real estate.
The market is improving, but many homeowners still have “Underwater” loans (in which the debt owed is higher than the home’s current value) and are seeking Short Sales for their properties. When a home is sold as a Short Sale, the bank agrees to forgive the difference between what you owe and what it can currently be sold for. This is desirable as a less damaging alternative to foreclosure. Up until 2007, the difference between what you owed the bank and what the home sold for could be considered income and result in a big income tax bill for the year. When the Real Estate market hit its downturn in 2007, the government intervened by waiving this tax burden. Mortgage Debt Tax Relief was due to end this year but, fortunately, has been extended for another year. If recent price gains haven’t relieved your debt situation, there’s still time to work with your bank without worrying about a massive tax bill.
The Mortgage Insurance Deduction
Another issue that was a concern for homeowners was the loss of the Mortgage Insurance Premium deduction. This deduction is for Mortgage Insurance Premiums for taxpayers earning below $110,000. The deduction is now extended through 2013 and has been made retroactive to cover 2012, since it lapsed early last year.
Energy Saving Credits
Many homeowners get additional value from their energy saving home improvements by taking advantage of tax credits worth up $500 a year. This program will now continue through 2013 and has been retroactively extended to 2012 taxes, as well. This is good for homeowners and the many companies who get a boost in business for installing eligible home improvements.
Individuals earning under $250,000 and joint filers earning under $300,000 can breathe a sigh of relief. The “Pease Limitations” for itemized deductions this are back for this tax year, but only for higher earners. These limitations affect homeowners by reducing mortgage interest deductions and state, local and property tax deductions. (They also apply to charitable deductions and most other itemize-able expenses aside from medical deductions.)
Pease Limitations apply to taxpayers over the income cap as follows:
The limitations on your deduction are the lesser of (a) 3% of the adjusted gross income above the income cap or (b) 80% of the amount of the itemized deductions being claimed for the tax year. For example: If a joint-filing married couple earned $500,000 and had itemized deductions adding up to $35,000, the Pease Limitations would reduce itemized deductions by $6,000. This amount is reached by calculating 3% of the $200,000 by which the couple exceeds the income cap. In this case, 80% of the deductions is $28,000 and so the lesser figure applies.
The Capital Gains tax will remain at 15 percent for those who earn up to $400,000 (for individuals) and $450,000 (for joint filers). Above that, any gains will be taxed at 20 percent. The $250,000 individual/$500,000 exclusion for sale of principle residences remains in place.
I also recommend that you read my article on the New Medicare Tax for 2013 and how it affects Real Estate sales.