The fiscal cliff deal helps homeowners by:
- extending the Mortgage Forgiveness Debt Relief Act, which excuses the debt forgiven on a short sale or principal reduction;
- allowing homeowners to write off mortgage insurance premiums or guarantee fees on Federal Housing Administration (FHA), Veteran’s Affairs (VA), Fannie Mae and Freddie Mac (Frannie) or Rural Housing loans, as long as their household income doesn’t exceed $110,000; and
- providing up to $500 in tax credits for homeowners who made energy efficient installations.
These tax benefits are good for the tax years of 2012 and 2013.
However, there are some downsides for homeowners too. The fiscal cliff deal will take a chunk out of the wallets of employed Americans due to the expiration of the payroll tax break. Payroll taxes taken from each paycheck increased two percentage points on earned income up to $113,700 for 2013.
Over the course of a year, this translates to $1,000 in reduced spending power for the average California employee. Their reduced income becomes someone else’s reduced income. This ripple effect slows and extends the period for California’s recovery.
first tuesday insight
While a majority of the fiscal cliff resolution benefits homeowners, and in particular negative equity homeowners, renters get nothing from this deal. Zip.
Worse, the payroll tax increase in 2013 reduces consumer spending power. This knife cuts both owners and renters. However, this reduction is offset for homeowners who receive the tax savings above. Renters are given zilch.
Thus, there has seldom been a better time for renters to become homeowners.
Encourage renters into homeownership by citing:
- today’s high buyer purchasing power, evidenced by historically and economically low interest rates;
- home pricing is again realistic at the historical mean price level last seen in 1999; and
- the continued tax benefits of owning, including:
- the mortgage interest deduction (MID),
- mortgage insurance premium and guarantee fee write-offs for certain loans (including FHA loans, which are particularly attractive to first-time homebuyers); and
- savings from energy efficient installations.
Although these savings alone are far from the primary motivating factor inducing a renter to buy, make sure your potential buyers are well aware of these indirect financial benefits. In today’s temporary market, tax aspects subsidize the purchase and carrying costs of a home of greater size and amenities.
For more on these and other financial benefits to homeownership, see:
Re: ‘Fiscal cliff’ accord allows homeowners to take tax deductions that had expired from The Washington Post