Congress Helps Homeowners

Homeowners fare well in the fiscal cliff deal passed by the Senate and House on Jan. 1. The American Taxpayer Relief Act of 2012 apparently extends a law that expired at the end of 2011, which allowed for the deductibility of mortgage insurance (MI) premiums, according to a research report from Isaac Boltansky with Compass Point Research & Trading. The law now applies to fiscal years 2012 and 2013.

"The law dictates that eligible borrowers who itemize their federal tax returns and have an adjusted gross income (AGI) of less than $100,000 per year can deduct 100% of their annual MI premiums," Compass Point said. "Certain borrowers with AGIs above $100,000 may benefit from the deductibility as well but are subject to a sliding scale. The tax break covers private MI as well FHA MI and VA and Rural Housing Service fees. In 2009, about 3.6 million taxpayers claimed the MI deduction," the research firm added.

One of the more watched provisions of the fiscal cliff was the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on Dec. 31. The fiscal cliff deal extends it for another year, meaning homeowners who experience a debt reduction through principal forgiveness or a short sale are exempt from being taxed on the forgiven amount.

"The amount extends up to $2 million of debt forgiven on the homeowner's principal residence," Compass Point Research & Trading said. "For homeowner's to qualify, their debt must have been used to 'buy, build, or substantially improve' their principal residence and be secured by that residence. The law, which was passed in 2007 with a 5-year sunset provision, will now be in effect until Jan. 1, 2014."

Another win for housing is a provision tied to the government's plan to increase the capital gains tax rate from 15% to 20% for individuals who earn more than $400,000. While in theory, this is harder on higher-income homeowners, Compass Point sees a silver lining through an exclusion. Compass Point notes the law "states that only gains of more than $250,000 for individuals ($500k for households) are subject to taxes on the excess portion of capital gains. Point being, in order for an individual homeowner to be impacted by the increased capital gains tax rate they would need to have an adjusted gross income above $400,000 and gain more than $250,000 from the sale of the property. Since this exclusion threshold remained intact, the impact of the capital gains tax increase is limited."

Although the mortgage deduction was not singled out for limitation, there were limits placed upon itemized deductions for higher income earners. Beginning in 2013, the limitation reduces itemized deductions by 3% of the amount by which the AGI exceeds the following inflation-adjusted threshold amounts -- not to exceed 80% of the total allowable deductions-

-$300,000 for joint filers and a surviving spouse-$275,000 for heads of household-$250,000 for single filers-$150,000 for married taxpayers filing separately.