The recent bill passed to avoid the financial crisis we now identify as “The Fiscal Cliff” has some items in it that will impact housing for the short term. However, some items are yet to be addressed, and they could still have a much bigger impact on the future of the housing market on a national scale.
First, let’s look at what the bill renewed:
# 1 – Mortgage Debt Relief Forgiveness Act – Extended through 2013
The Mortgage Debt Relief Forgiveness Act is a huge issue for housing, but an issue that we can all hope will be in our rear view mirror come the end of 2013. The issue is important due to the continued presence of Short Sales and Foreclosures. The Mortgage Debt Relief Forgiveness Act “forgives” the money the bank loses. Basically, if someone owes $250k on a home they bought in 2006, and it’s now worth $200k, the bank is going to lose that $50k when the home is sold and the mortgage is “satisfied.” What happens to that $50k – well, the bank takes it as a loss… which means someone must take it as a “gain” or income. The act forgives the $50k in “income” so it is not taxable. Come 2014, the seller could receive a tax bill in for the $50k in income. At a 20% tax rate – that’s $10k! Pretty significant. The act only applies to Primary Residences (the home you live in at least 6 months per year) and the maximum amount forgiven is $2 million.
# 2 – Tax Credits for Energy Efficient Improvements
This measure provides minimal credits ($200 – $500) for energy efficient improvements – such as windows, insulation, etc. It applies to improvements done in 2012 or 2013.
# 3 – Tax Credits for Energy Efficient New Homes – Continued through 2013
This credit ($2000) is for homes that meet the federal guidelines of an energy efficient home. In my experience…. good luck getting the necessary documentation from your builder. It also applies to the use of domestic appliances that are energy efficient.
# 4 – Mortgage Insurance Deduction – through 2013
This isn’t a biggie…. first of all, income threshold is $110,000 – so, if you’re making that, it doesn’t apply. Secondly, you’re looking at a total deduction of about $2500 per year – on the upper end. It will save you $400 or so in taxes, so that’s real money. It all spends!
The bigger news is what wasn’t in the bill…. The Mortgage Interest Deduction (MID). This is a big deal – for everyone that owns a home, or at least the majority. I would estimate that on recently purchases/refinanced homes, 85% of your payment is interest. So, if your Principal and Interest payment is $1000 (not including your Taxes and Insurance if you escrow those items), you’re paying $850 per month in INTEREST. That is over $10,000 per year. Using the lower tax bracket of 15% – that’s still $1500 per year (over $100 per month) that your losing…. think about that… it’s like doubling your cable or phone bill.
The MID is not dead. When they reconvene in the spring and start digging into tax reform, it will be on the table… or the chopping block. This may be the item that has the single biggest impact on housing, and if removed, it could seriously impact the housing recovery. For years, people have weighed renting versus owning and the differentiating factor was often times the tax benefit. Sure, you’re going to have an “asset” in 30-years worth something (assuming you don’t treat it like an ATM). However, not too many of us can look past next year, let alone 29 more!