Homeowners and real estate professionals anxiously waited to see if real estate tax breaks would survive the fiscal cliff deal. In the end, the breaks for homeowners survived, at least for the time being.
The mortgage interest deduction remained intact, and the deal extended mortgage debt forgiveness for one year. Prior to 2007, if lenders forgave debt on short sales, loan modifications and foreclosures, the amount forgiven was taxable. Then in 2007, Congress passed a law making that “income” non-taxable, and that break was set to expire at the end of 2012. But when crafting the fiscal cliff deal, they extended mortgage debt forgiveness for one more year.
Also part of the package was a provision allowing homeowners to deduct the amount they pay for private mortgage insurance (PMI). More homeowners are required to carry PMI by lenders because of tighter lending standards, so this is good news for those homeowners.
In the end, these three provisions will help the real estate market, at least in the time being. The measures should help lower the amount of “shadow inventory”—that is, properties that have delinquent mortgages, are in the process of foreclosure, or are already owned by banks but have not yet been put on the market. Experts expect investors to snap up this inventory and help the recovery, something that might not have happened if the real estate tax breaks failed to survive the fiscal cliff deal.
Click here for more on what’s included in the deal.