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Homeowners Gain Some Key Benefits from Fiscal Cliff

January 28, 2013
From Loan Officer Lou King

From Loan Officer Lou King

The fiscal cliff deal (American Taxpayer Relief Act of 2012) was over 150 pages!  Tucked within that mammoth pile of paper are a few key benefits that can help your buyers, sellers and anyone who owns a home.

The three aspects of the bill that benefited the real estate market most were not new, but previous provisions that were reinstated or extended.

1. Deductibility of mortgage insurance premiums.  Homeowners can once again write off the cost of their mortgage insurance premiums, which can be a significant amount. This deduction, which was created in 2007 to give a boost to the housing market, is limited to households with an income below $110,000. This is being applied retroactively to premiums paid in 2012 as well through 2013.

2. Tax exemption on forgiven mortgage balances extended. The Mortgage Forgiveness Debt Relief Act of 2007 was extended through 2013. In short sales or principal reduction situations, the amount a lender forgives is generally considered income to the seller, for tax purposes even though the seller doesn’t receive funds. Through the extension of this legislation, the forgiven amount will continue to be tax-free for another year. If it had expired as planned, it would hinder many underwater homeowners from selling their homes.

3. Home Energy improvement credit extended. Homeowners who want to make energy-saving renovations, like a new furnace, windows, or added insulation, can receive up to $500 in a federal tax credit. The credit is calculated as 10% of the total amount spent on qualified expenses. This credit applies to any purchases made in 2012 and going forward in 2013.

While $500 may sound minimal, a tax credit is different than a deduction. A deduction reduces a person’s taxable income, but a tax credit literally reduces what’s owed or increases what’s refunded, dollar for dollar. For example, if a homeowner owes $1,000 before the tax credit, he will owe just $500 after. A refund of $300 will increase to $800. So the tax credit is pretty significant, and gives buyers an added incentive to buy a home that needs improvements.

Share this information with your customers because most of these provisions are set to expire at the end of 2013. When it comes to the tax code and how it affects homeowners financially, it’s best to direct customers to a tax advisor.

The content is intended for general information purposes only. It should not be construed as legal or tax advice. You are advised to consult your legal or tax advisor for specifics.

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