●Do you, like millions of Americans, pay mortgage insurance premiums or guarantee fees on an FHA, VA, Fannie Mae, Freddie Mac or Rural Housing loan? The American Taxpayer Relief Act — the fiscal cliff compromise bill — allows you to write off the insurance premiums you paid during 2012 along with your mortgage interest, provided your 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.
●Did you do some energy-efficiency renovations in your home during 2012 — installing insulation, energy-saving windows, doors, roofing material, non-solar water heaters and the like? Maybe you’re thinking about doing a little green rehab in 2013? For either year, you 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 your federal tax return.
●Are you planning a short sale of your underwater home this year or hoping to receive a principal reduction on your loan as a result of a mortgage modification by your lender? The new legislation reauthorized the Mortgage Forgiveness Debt Relief Act, which had been scheduled to terminate Dec. 31, sparing you potentially punitive federal taxes on the amount forgiven. Had the debt relief exception 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 that thousands of financially distressed homeowners would have been devastated by the expiration. Alexis Eldorrado, a Chicago-area real estate specialist in short sales, says 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 gains that exceed current exclusion limits of $250,000 (for single tax filers) and $500,000 (for married joint filers). Say you are a single earner with income of more than $400,000, or you’re married, file jointly and earn more than $450,000. Under the new legislation, you can expect to pay 20 percent on capital gains. So if you sell your principal residence this year and your gain on the sale is $750,000, the capital gains tax on the $250,000 above the $500,000 exclusion limit will be at 20 percent rather than the 15 percent they would pay under current law.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’s results — at least for a little while.
Ken Harney’s e-mail address is email@example.com.