January brought good news for the real estate and mortgage industries. Three items on the table will continue to help homeowners and aid in the real estate housing recovery process.
Welcome Back to Deductible Insurance Premiums – A law that expired at the end of 2011 was recently brought back by the American Taxpayer Relief Act of 2012, which allows for the deductibility of mortgage insurance premiums (also known as PMI). According to a research report from Compass Point Research & Trading, there were approximately 3.6 million taxpayers who claimed the mortgage insurance deduction in 2009. The law now applies again and will be in effect through the end of Fiscal Year 2013 (FY13).
Eligible borrowers with an adjusted gross income (AGI) of $100K or less per year who itemize their federal tax returns can deduct 100% of their annual mortgage insurance premiums. This usually includes borrowers who have less than a 20% down payment.
This tax break covers private mortgage insurance and mortgage insurance provided by the FHA, VA, and Rural Housing Service. Those who have mortgages backed by the FHA are only required to put down 3.5%, but are asked to carry mortgage insurance for five years.
Borrowers who make more than $100,000 may be eligible as well, but are subject to a sliding scale.
Forgive and Forget: Mortgage Debt Forgiveness – The fiscal cliff also extended tax breaks for those who have mortgage debt erased through short sales and loan modifications, known as the Mortgage Forgiveness Debt Relief Act of 2007, which was set to expire on December 31, 2012 will now be in effect until January 1, 2014.
The fiscal cliff deal extended 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, up to two million dollars. In order to qualify the debt must be for their primary residence.
For instance, in a short-sale situation, the lender can accept less than what is owed on the home. The amount of the principle that is not paid (the difference), is generally considered taxable income, which would potentially force more homeowners in hot water to walk away. Walking away (foreclosing) costs lenders much more and has a far greater negative impact on borrowers’ credit scores. With this act, the difference is simply wiped away, and the borrowers’ credit can be repaired rather quickly.
This exemption has little to no impact in “non-recourse” states, such as California. In CA, once a lender forgives the debt they have no recourse to come after the borrower for the rest, but a major win for states like Florida where short sales, once a rarity, have become increasingly common. In FL many homeowners who purchased their home prior to 2008 owe much more than their homes are worth. Short sales now represent about 1/3 of the housing market.
Mortgage Interest Deduction Remains Intact – Finally, the mortgage-interest deduction Americans love so much remains intact; however, it remains to be seen if this popular mortgage interest tax deduction will be part of a long-term deficit reduction plan.
All of this is great news for the US, especially hard hit Central Florida. These provisions will continue to assist in the housing recovery, hopefully resulting in rising prices and fewer short-sales and foreclosures.