The mortgage industry can breath a sigh of relief with the final fiscal cliff deal bringing back a popular tax break on mortgage insurance premiums and debt forgiveness for borrowers who go through a short-sale or some other type of debt reduction.
A topic that is still up for discussion and likely to surface later in the year is whether the popular mortgage interest tax deduction will be part of a long-term deficit reduction plan.
Still, the deal passed by the Senate and House on Jan. 1 is one that leaves room for hope in the housing market.
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 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 mortgage insurance 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 mortgage insurance as well as mortgage insurance provided by the FHA, the VA, and the Rural Housing Service. In 2009, about 3.6 million taxpayers claimed the mortgage insurance 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 mortgage 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.”
Published on HousingWire (http://www.housingwire.com)
By Kerri Ann Panchuk