Some Benefits From The “Fiscal Cliff Deal”

For those who have a mortgage, they may be able to breathe a sigh of relief as a result of the passage of the last minute “Fiscal Cliff Deal”.  Intertwined with all the wrangling and angst some good things resulted in the passage of the new legislation.

First and foremost, for anyone facing a foreclosure or short sale on their principal residence, they can rest assured that the amount of debt forgiveness up to $2,000,000.00 will be exempt from income taxation.  The law known at the Mortgage Debt Forgiveness Relief Act of 2007 was extended for another 12 months through January 1, 2014.  While extension of this law was not as critical in Arizona as it is in other states that do not have an anti-deficiency law, it is perceived by the public as necessary to avoid such income taxation on the amount of debt forgiven in either a short sale or foreclosure scenario.  This law does only apply, however, to a situation involving a deficiency with a principal residence where the debt was incurred to purchase, build or substantially improve a principal residence and the debt is secured by that residence.

With the extension of this Mortgage Debt Forgiveness Relief Act of 2007, there will continue to be, in Arizona, two bases for a homeowner to exempt from income the debt forgiveness – a claim under the Mortgage Debt Forgiveness Relief Act of 2007 that has now been extended and also by claiming the debt as being a non-recourse loan.  Either way, the debt forgiveness will be exempted from being included as income for purposes of income taxation.

Secondly, the law to avoid the fiscal cliff did not, as many were concerned might occur, eliminate the popular mortgage insurance tax deduction.  The American Taxpayer Relief Act of 2012 extends a law that expired at the end of 2011.  The American Taxpayer Relief Act of 2012 permits the deductibility of mortgage insurance premiums.  There are, however, certain limitations.  Those taxpayers with an adjusted gross income of less than $100,000.00 can deduct 100% of their annual mortgage insurance premiums.  Taxpayers with more than $100,000.00 of taxable income, may also benefit but on a reduced sliding scale.

Another win, albeit minor, concerns the government’s increasing the capital gains tax rate from 15% to 20% for individuals who earn more than $400,000.00.  The law provides that only gains of more than $250,000.00 for individuals ($500,000.00 for households) are subject to taxes on the excess portion of capital gains.  Thus, in order for an individual homeowner to be affected, they would first have to have an adjusted gross income above $400,000.00 and then have a gain of more than $250,000.00 from the sale of their property.  Thus the amount of the exclusion remained the same.  Therefore,  it will only potentially impact those individuals with incomes over $400,000.00 combined with a capital gain of over $250,000.00 ($500,000.00 for a household).

So, despite what your opinion is of the law that was passed to stop our country from being pushed off the “cliff” there was some benefit for property owners.  As an optimist, I always have to look for the positive!!