Fiscal cliff deal supports mortgage industry, leaves debt forgiveness law untouched

By Gretchen Wegrich

Mortgage professionals can finally celebrate the passage of the fiscal cliff deal, which included debt forgiveness for borrowers who participate in debt reduction or a short sale as well as the return of a tax break on mortgage insurance premiums.

The jury is still out on whether the well-liked mortgage interest tax deduction will become a mainstay of the long-term deficit reduction plan, or will be phased out later this year. 

Regardless, the fiscal cliff deal passed Jan. 1 by the Senate and the House appears to be beneficial to the housing market and mortgage rates.

Included in the American Taxpayer Relief Act of 2012 is a two-year extension of a law that expired in late 2011, which allowed mortgage insurance premiums to be tax deductible, reported Compass Point Research & Trading.   

According to the law, eligible borrowers with adjusted gross income [AGI] of less than $100,000 per year are able to deduct 100 percent of annual mortgage insurance premiums with itemized federal tax returns, wrote Compass Point.

For borrowers with AGIs above $100,000, benefits are subject to a sliding scale. Included in the tax break are private mortgage insurance and FHA, VA and Rural Housing Service insurance. According to Compass Point, 3.6 million taxpayers claimed this deduction in 2009.

Included in the fiscal cliff deal is a year extension of the Mortgage Forgiveness Debt Relief Act of 2007, a key provision that would have expired Dec. 31. Under the extension, homeowners are exempt from taxation on the forgiven amount if they receive a debt reduction under mortgage principal forgiveness or a short sale.

Under the Mortgage Forgiveness Debt Relief Act, up to $2 million in debt can be forgiven on a principal residence. In order to qualify, a homeowner’s debt must be used to ‘buy, build or sustainably improve’ the principal residence and be secured by the residence.

Also benefitting the housing market is a provision linked to the capital gains tax rate increase from 15 to 20 percent for individuals with incomes above $400,000. The impact of the increase is limited by an exclusion that declares that only gains above $250,000 for individuals or $500,000 for households are able to be taxed on the excess capital gain amount. Therefore, individual homeowners must have an AGI of more than $400,000 and earn more than $250,000 from a property sale in order to be affected by the tax rate increase.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.