The Impact of the Fiscal Cliff on Residential Real Estate in Cincinnati
According to an article from TheStreet.com the outcome of the fiscal cliff negotiations could have a major impact on the the residential real estate market. My biggest concerns are the tax breaks that, if reduced or eliminated, could have a negative effect on the recovering housing market.
Mortgage Interest Deduction
The mortgage interest deduction reduces a homeowners’ income taxes by allowing them to subtract their mortgage interest payments from their personal income. Eliminating or even reducing that tax break would raise the taxes of millions of homeowners because the mortgage interest deduction applies to loans up to $1 million.
Mortgage Forgiveness Debt Relief Act
Another tax break set to expire next year is the Mortgage Forgiveness Debt Relief Act. It is a Bush-era tax break that relieves homeowners from being taxed on any mortgage debt that was forgiven through a short sale, foreclosure or loan modification. If this tax break expires, the forgiven amount will be counted as taxable income. Many of the homeowners who qualify for this deduction are experiencing hardships such as a job loss, divorce, death, health crisis or other major life event to be eligible for a short sale. This change adds a further burden to the financial future of these individuals and families.
This may decrease the number of homeowners choosing to opt for a short sale as opposed to a foreclosure, impacting the housing market and the bank’s bottom lines. Homes that sell in a short sale tend to sell for higher dollar and in better condition than a foreclosure because often the homeowner is still living there and maintaining the home. If this deduction is eliminated property owners who are upside down in their mortgages would owe income tax on any forgiven debt after the bank accepts the short sale. This change could slow the housing recovery by further driving down prices, which could weaken home price gains for consumer owned homes as well.
Example: If you own a $250,000 house , owe $200,000, and the bank accepts a $150,000 short sale, the $50,000 deficit would be taxed as income if this deduction is eliminated.
Mortgage Insurance Tax Deduction
The tax deduction on mortgage insurance is also set to expire at the end of this year. Purchase Mortgage Insurance or (PMI) is generally required of borrowers who make down payments of less than 20%. Today many homeowners put down less money with record low interest rates assuming since they can write off their PMI. Borrowers who made decisions on their financing with this deduction in place may refinance if their home or pay down their loan to an 80/20 loan-to-value ratio. The PMI can be canceled once the equity exceeds 20%, which normally happens after a few years of appreciation. But the collapse in home prices a few years ago left many homeowners far short of 20% equity, so eliminating the insurance deduction could raise costs for millions.
The Fed is also finishing up a program called Operation Twist. Operation Twist is the nickname for the Fed’s initiative of buying longer-term Treasuries and simultaneously selling shorter-dated issues it holds in order to bring down long-term interest rates. There is speculation that this program may be phased out which could impact interest rates.
With this information in mind, you should consult your financial planner especially if you have been counting on tax deductions from your mortgage interest, PMI deduction, or could potentially need to sell your home in a potential short sale. This legislation will impact most homeowners who have financed their homes. Please contact me at 518-1140 or firstname.lastname@example.org if you have further questions about how this may impact you. I can recommend financial planners or information about your loan to value ratio and your ability to eliminate your PMI.