In the early morning hours of January 1st, 2013, the United States Senate passed the “American Taxpayer Relief Act of 2012”, which basically means that some tax cuts due for expiration were extended, some expired, and no spending cuts were made. So the gluttony of debt will continue in this country. But what changed or did not change in the real estate arena and how will it affect real estate investors?
Here are the 5 main ways that the ‘Fiscal Cliff’ deal will impact real estate investors in the upcoming year:
Fiscal Cliff Deal Impacts Real Estate Investors | Capital Gains
The biggest news for real estate investors was the agreement to keep the long term capital gains tax at 15% for those at the top rate of $400,000 individual and $450,000 joint return. After that, any gains above those amounts will be taxed at 20%. Capital gains tax is the tax charged to taxpayers when they buy or sell an investment property, so this news is welcome relief to many investors.
In addition, the bill included an extension to keep tax-free the sale of a primary residence for American homeowners who profit $250,000 or less ($500,000 for married couples) from the sale of their home. This extension is also only available for those earning under $450,000 per year in income.
Fiscal Cliff Deal Impacts Real Estate Investors | Real Estate Tax Extenders
According to the National Association of Realtors, here are the 3 real estate tax extenders:
- Deduction for Mortgage Insurance Premiums for filers making below $110,000 is extended through 2013 and made retroactive to cover 2012
- Leasehold Improvements: the 15 year straight-line cost recovery for qualified leasehold improvements on commercial properties is extended through 2013 and made retroactive to cover 2012.
- Energy Efficiency Tax Credit: the 10% tax credit (up to $500) for homeowners for energy efficiency improvements to existing homes is extended through 2013 and made retroactive to cover 2012.
Fiscal Cliff Deal Impacts Real Estate Investors | Estate Tax
Here is the final numbers for the estate tax: the first $5 million dollars in individual estates and $10 million for family estates are now exempted from the estate tax. After that the rate will be 40 percent, an increase from 35 percent. The exemption amounts are indexed for inflation.
Fiscal Cliff Deal Impacts Real Estate Investors | Mortgage Interest Deductions
The mortgage interest tax deduction, which was reportedly on the Congressional chopping block, was left alone by Congress. Some argue that this is a $100b drain on the economy while others argue that this is a good tax break for the middle class home owners. Congress also extended the tax deduction for private mortgage insurance (PMI) payments through December 31, 2013. This means that homeowners who did not put 20% down and paid for private mortgage insurance will remain tax deductible for 2013.
Fiscal Cliff Deal Impacts Real Estate Investors | Debt Relief Act
Last, but certainly not least, the bill extended the government’s waiving of the tax that would normally be paid by homeowners who have part of their loan “forgiven” in a foreclosure or short sale. Before The Debt Releif Act was enacted, homeowners who’s debts were forgiven in a short sale or foreclosure were confronted with a tax bill on the forgiven amount, taxed as though the unpaid debt were income.
What do you think of the Fiscal Cliff deal and how do you think it will impact the real estate market in 2013? Leave your comments below.