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October 15, 2012

Attention homeowners: two mortgage tax deductions at risk

by Central Coast Lending
Real Estate (1.2)

Taxation, regulation, and national debt are at the forefront of the 2012 election cycle, as the nation decides how to build a solid platform for economic growth. Two well-known tax cuts will be at the center of the tax code reform discussion: the home mortgage interest tax deduction and the Mortgage Forgiveness Debt Relief Act, the latter of which is due to expire at the end of the year. The elimination of either tax break would increase the tax bill for some homeowners, and - in the case of the Mortgage Forgiveness Debt Relief Act – hurt the short sale market.


Home Mortgage Interest Tax Deduction

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Presidential candidate Mitt Romney has said that he would reduce tax “loopholes” to help pay for sweeping tax cuts and reduce the budget deficit. One such loophole, the popular (yet hefty) home mortgage interest deduction is expected to cost the government $84 billion in 2012.

On Tuesday, October 9 Romney addressed speculation that his tax plan would eliminate the home mortgage interest deduction, telling CNN’s Wolf Blitzer:

At the same time, how we carry them out would be lowering the rate, the tax rate, across the board and then making up for that both with additional growth and with putting a — a limit on deductions and — and exemptions, particularly for people at the high end.

And I can tell you, with regards to the deductions you describe, home mortgage interest deduction and charitable contributions, there will, of course, continue to be preferences for those types of expenses.

[Related: Will the mortgage interest tax deduction survive the budget debate?]

From that quote, it sounds like Romney would give the popular mortgage tax deduction special consideration, especially for the middle class.


Mortgage Forgiveness Debt Relief Act

The tax deductions passed under Congress’ 2007 bill Mortgage Forgiveness Debt Relief Act and Debt Reduction Cancellation, are out on a much longer limb, putting pressure on distressed homeowners and the short sale market.

In the past, cancelled or forgiven debt was reported as taxable income, which included short sales or mortgage principal deduction. The Mortgage Forgiveness Debt Relief Act helped struggling homeowners by canceling that particular tax obligation, as the nation grappled with the massive housing market collapse.

On December 31 of 2012, the Bush tax cuts are set to expire and $1.2 trillion of spending cuts over 10-years will be automatically activated. Congress will attempt to hash out a debt deal that will avert disaster from this “fiscal cliff.” 

As we wrote on August 20, 2012, home foreclosures activity has generally declined over the past year, especially because banks are allowing distressed borrowers to “short sell” the house for less than the value of the mortgage rather than entering into the foreclosure process.The tax cut, like other Bush-era tax cuts, is set to expire by the end of 2012 as the “fiscal cliff” (left sidebar) approaches and unless Congress acts, the landscape of the real estate recovery will significantly shift.

Without the debt-forgiveness tax deduction, home sellers participating in a short sale would find a significant increase in their tax bill. Should this deduction expire, short sale activity will likely drop sharply and foreclosures will again increase.

This would also effect homeowners benefitting from the $25 billion dollar settlement agreed upon by five of the nation’s largest banks in the wake of the robo-signing foreclosure scandal. Part of the settlement called for principal reduction $20,000 average per borrower, and with the debt-forgiveness reduction, such homeowners would find their tax payment much higher.


What to expect?

So far we know that a Senate panel backs the extension of mortgage debt relief law and has approved a bipartisan bill to extend it through 2013.

The housing recovery is moving the right direction, but there are 12.3 million loans that are “underwater”, representing $1.2 trillion in negative equity. It seems likely that these popular, successful measure will be continued.

On the other hand, it is important for all people who face this dilemma to consider acting sooner than later. The gamble that the act will be extended could prove to have an expensive downside.


Central Coast Lending is a California mortgage brokerage based in San Luis Obispo County. With offices in San Luis Obispo, Morro Bay, Paso Robles, and Arroyo Grande, Central Coast Lending is the top source for Central Coast mortgage, real estate, and home loan needs. To see why using a broker offers lower rates and superior service, click HERE. For a free, hassle-free online pre-qualification click HERE or call 805.543.LOAN to talk to one of our expert loan officers.

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