How the “Fiscal Cliff” Bill Affects Home Owners

Lost in our collective sigh of relief that the “Cliff” was avoided and all the political gnashing of teeth has been the actual contents of the bill and how it affects us.  More specifically, how it affects home owners.

How will the fiscal cliff affect home owners?

The big win for home owners was that the mortgage interest deduction was left untouched.  Many of us look at that deduction as one of the perks of owning a home and while the National Association of Realtors has long argued that the housing market would suffer dramatically without the deduction it still seems to come before the chopping block on a fairly regular basis.

One tax deduction that keeps finding new life is that for mortgage insurance.  Mortgage insurance is required for home purchases where the buyer has less than 20% down payment.  Enacted in 2007 and extended a few times since then mortgage insurance premiums can be deducted on Schedule A of your tax return through the 2013 tax year.  There are income limits for this deduction.

Another tax break that was signed into law in 2007 and extended in the “Fiscal Cliff” deal is for those who have mortgage debt erased through short sales, loan modifications and foreclosures.  Prior to 2007 the amount of mortgage debt that the lender “wrote off” was considered taxable to the borrower.  For example, borrower owes $250,000 on his home in Bend, Oregon but has to short sell it for $175,000.  Without the extension of this tax break, the $75,000 difference between what was owed and what the home sold for would have been taxable to the borrower.  The thinking behind extending this law was to encourage or at least not discourage under water home owners to do short sales or loan modifications.

As always, this post is not intended as tax advice.  If you have questions about how the “Fiscal Cliff” deal affects your tax situation you should consult a tax professional.

About Dan Seim

Dan Seim is the primary contributor to Preferred Residential's blog. He has been writing about real estate issues that affect home owners in Bend and Central Oregon since 2011.

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