‘Cliff’ deal’s housing bonus

Compromise bill revives two key housing tax benefits
By Kenneth Harney | February 01, 2013 07:00AM

Although it wasn’t a total win for homeowners and sellers, the patchwork legislation that emerged from the fiscal cliff fracas on Capitol Hill came pretty close. In fact, it even reached back and resuscitated two key tax benefits for housing that had expired more than a year ago. Now homeowners will be able to take deductions on their upcoming 2012 tax returns that they assumed were no longer available.

Here’s a quick tally sheet on what the new legislation could mean for buyers, sellers and owners (see related story: The taxman cometh).

Millions of Americans pay mortgage insurance premiums or guarantee fees on an FHA, VA, Fannie Mae, Freddie Mac or Rural Housing loans. The American Taxpayer Relief Act — the fiscal cliff compromise bill — allows them to write off the insurance premiums they paid during 2012 along with their mortgage interest, provided the household income does not exceed $110,000. Legal authorization for this deduction expired at the end of 2011. But the new bill retroactively permits write-offs for all of 2012 and 2013 for qualified borrowers.

Homeowners who did energy efficiency renovations during 2012 — installing insulation, energy-saving windows, doors, roofing material, nonsolar water heaters and the like — or are thinking about doing a little green rehab in 2013 may be able to claim up to a $500 tax credit, thanks to the revival of a home energy improvement incentive that lapsed in 2011. Five hundred bucks may not sound huge, but remember: It’s a credit, not a deduction, so it means $500 off the bottom line of their federal tax return.

The new legislation reauthorized the Mortgage Forgiveness Debt Relief Act that had been scheduled to terminate Dec. 31, and spares potentially punitive federal taxes on the amount forgiven. Had the debt relief exception in the tax code not been renewed, large numbers of underwater owners participating in short sales — where banks agree to accept less than the full amounts owed on a loan as part of a sale to a new buyer or investor — would have faced taxation on the full amount forgiven as if it were regular income.

Lenders and real estate brokers say thousands of financially distressed homeowners would have been devastated by the expiration. Alexis Eldorrado, a Chicago-area real estate specialist in short sales, said she has five clients who are underwater on their mortgages by an average of $100,000 and awaiting short sale closings in the coming weeks. They probably would have had to file for bankruptcy — or go to foreclosure — had Congress not renewed the debt forgiveness law, she said, because none of them could afford to pay taxes on $100,000 they never actually received.

What’s in the legislation that some buyers or sellers might not like? Start with steeper capital gains taxes for high-income sellers with big gains that exceed current federal exclusion limits of $250,000 (single tax filers) and $500,000 (married joint filers). Under the new legislation, single filers earning more than $400,000 or married joint-filers earning more than $450,000 can expect to pay 20 percent on capital gains. So if they sell a principal residence this year and the gain on the sale is $750,000, the capital gains tax on the $250,000 excess above the $500,000 exclusion limit will be at 20 percent rather than 15 percent. Sellers with income below the $400,000 threshold will still pay capital gains taxes at 15 percent, and earners at the two lowest tax brackets will pay zero on capital gains.

Another negative: The fiscal cliff deal limits deductions for mortgage interest, property taxes, charitable donations and other write-offs for single-filing taxpayers with adjusted gross incomes above $250,000 and married joint-filers above $300,000. The formula it uses is complex, but it could amount to about $1,000 in additional tax liability for a couple with an income around $400,000, according to housing industry estimates.

All in all, not so bad. Then again, major tax reform efforts are coming this spring, with mortgage interest and other real estate write-offs prominent among the targets. So enjoy the fiscal cliff bill results — at least for a little while.

 Kenneth Harney is a syndicated real estate columnist.