If you’ve watched the news or been on any economic website or social media platform; there’s no doubt you’ve been inundated with updates on the Fiscal Cliff. While this news can cause worry for many wondering what this will mean for the future of their taxes, it appears as those most households can rest in the fact that their taxes will remain relatively the same and that the mortgage cancellation relief has been extended.
In working for over twenty years in the Lake Nacimiento Real Estate market, one of my goals is to bring you the most up to date housing market information. Whether you are buying or selling a home in Oak Shores or Heritage Ranch, you can be sure to find the pertinent information you need right here on my blog and website!
Recently, I came across this article that explains in detail the recent developments in the Fiscal Cliff as it pertains to the housing market. Take a look!
On January 1, 2013, in Breaking News, Politics & Government by Robert Freedman
Tax rates would remain the same for most households and mortgage cancellation relief is extended in a budget package passed by the U.S. Senate early this morning to avert the so-called fiscal cliff. The House today could take up the bill, which NAR has been monitoring closely because the fiscal cliff’s automatic tax increases and federal spending cuts involve programs important to real estate and impact household wealth. Based on what the House does, the provisions in the Senate bill could change in the final bill.
The “American Taxpayer Relief Act of 2012’’ passed on a bipartisan 89-9 vote in the middle of the night and extends current tax rates for all households earning less than $450,000, and $400,000 for individual filers. For households earning above these limits, tax rates would revert to where they were in 2003, when taxes were reduced across the board. That means taxpayers in the highest bracket would pay taxes on ordinary income at a rate of 39.6 percent, up from 35 percent.
The tax rate on capital gains would also remain the same, at 15 percent, for most households, but for those earning above the $400,000-$450,000 threshold, the rate would rise to 20 percent.
Importantly from NAR’s perspective, the exclusion from taxes for gains on the sale of a principal residence of up to $500,000 ($250,000 for individuals) remains in effect, so only home sellers whose income is $450,000 or above and the gain on the sale of their house is above $500,000 would pay taxes on the excess capital gains at the higher rate (with corresponding numbers for individual filers). For the vast majority of home sellers, there is no change.
The bill also reinstates provisions that phase out personal exemptions and deductions for incomes over $250,000 for singles and $300,000 for couples.
A number of what lawmakers call extenders are in the bill. Extenders keep in place expiring tax provisions. Of most interest to real estate, the bill would extend mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, typically in a short sale or foreclosure sale for sellers and in a modification for owners. Without the extension, any debt forgiven would be taxable, which, for underwater households, represents a financial burden.
Also extended are deductions for mortgage insurance premiums and for state and local property taxes, which, along with the mortgage interest deduction, are important tax considerations for home owners and buyers.
In two other important provisions, the alternative minimum tax (AMT) is permanently adjusted for inflation, making it unnecessary for Congress to adjust it each year. The AMT was enacted in 1969 to help ensure a minimum tax bill for high-income households that would otherwise minimize their taxes by shielding much of their income in deductions and using other tax strategies. Because it was never indexed to inflation, AMT threatens to catch middle-income households in the tax, so Congress each year adjusts it. Now the adjustment would be permanent.
The other key provision is a change in the estate tax so that estates would be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. Currently, the top rate is 35 percent.
The other side of the fiscal cliff is hundreds of billions of dollars in automatic, across-the-board federal spending cuts, with a disproportionate share of the cuts affecting defense spending. The Senate bill would push back the deadline for the cuts for two months.
While this is a lot of information, the bottom line is that with the extensions in place, owners with homes that are underwater will not have to pay taxes on forgiven debt, which could have potentially been a great financial distress. Deductions for state and local property taxes have also been extended, which is great news for home owners and buyers.
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