Late in the evening of Tuesday, January 1st Congress reached a settlement in the “fiscal cliff” negotiations, and President Obama signed the legislation January 2nd. As a result, the Mortgage Forgiveness Debt Relief Act was extended 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 principal reduction), or foreclosure.
The same provision also expired in California, but Senator Ron Calderon (D-Montebello) introduced SB 30, which would waive the potential tax bill for Californians for all of 2013. C.A.R. already signed on as the bill’s sponsor, and the two hope to fast track the bill through the Legislature.
Also under the fiscal cliff agreement, the so called “Pease Limitations” that reduce the value of itemized deductions are permanently repealed for most taxpayers but will be reinstituted for high income filers.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 deduction. 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.
REALTORS® should encourage their clients to consult with their own tax advisers about their own individual tax situation.
Information provided by Sacramento Association of Realtors.