Late Tuesday night, Congress reached a settlement in the "fiscal cliff" negotiations. One of the major successes of the agreement was the extension of the Mortgage Forgiveness Debt Relief Act for another year.
The measure will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction) or foreclosure. REALTORS® across the country had called on Congress to extend the Mortgage Debt Relief Act, which essentially ended on Dec. 31, 2012.
"Without congressional action, families engaged in loan modifications, short sales, or foreclosures would have had to face a big tax bill," said Carolyn Miller, president of the Silicon Valley Association of REALTORS®. "The housing market and our economy are on the road to recovery. Neither consumers nor the housing market need that added burden at this time."
Also under the agreement, so called "Pease Limitations" that reduce the value of itemized deductions are permanently repealed for most taxpayers, but will be reinstituted for high income filers. These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000. The thresholds have been increased and are indexed for inflation so will rise over time. Under the formula, filers gradually lose the value of their total itemized deductions up to a total of a 20 percent reduction.
According to information released by the California Association of REALTORS®, the reinstitution of these limits has far less impact on the mortgage interest deduction (MID) than a hard dollar deduction cap, percentage deduction cap, or reduction of the amount of MID that can be claimed.
Capital gains rates on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 for married couples.
"At this time, we advise our clients to keep their short sales on the market and encourage them to consult with their own tax advisers about their tax situation," said Miller.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please email or call the SILVAR office at (408) 200-0100.