How the Fiscal Cliff Deal Helps Homeowners

The fiscal cliff deal (“H.R. 8”) reached on January 1, 2013 contains a couple of beneficial provisions for homeowners — tax-relief extensions that aren’t getting as much press as the rest of the bill. These include:

  • Extension of mortgage debt relief. A piece of the tax code that was due to expire at the end of 2012 allows homeowners whose mortgage debt was canceled or forgiven to exclude that amount from their income (up to a limit of $2 million or $1 million if married filing separately). If that doesn’t sound very exciting, realize that before 2007, homeowners who restructured their mortgages, gave the lender a deed in lieu of foreclosure, sold via a short sale, or in some other way discharged their obligation to their lender without paying the full loan amount were required to pay taxes on the difference. In other words, the amount of their debt that the lender had forgiven was considered taxable income, as if they had been handed that amount by the lender. The extension of this provision goes through tax year 2013.
  • Extension of PMI deduction. Homeowners paying less than 20% down are typically asked by their lender to pay “private mortgage insurance,” or PMI, which reimburses the lender if the homeowner can’t make the regular mortgage payments. PMI premiums were, from 2007 through 2011, deductible as “qualified residence interest” (like the rest of your mortgage interest). This deduction has been extended both retroactively (to cover 2012) and through 2013.  The deduction is phased out by 10% for each $1,000 by which the taxpayer’s adjusted gross income (AGI) is over $100,000. Thus, you can’t use the deduction if your AGI exceeds $110,000.
  • Extension of credit for energy-efficient home improvements. This one’s not likely to save you huge bucks, but Congress reinstated and extended through 2013 a 10% tax credit (under Section 25C of the Tax Code) for the cost of energy-efficient improvements to existing homes. This applies to such home features as windows, doors, skylights, fans, insulation, furnaces, and hot water heaters. Additional limits apply per item, and there’s a $500 overall limit for use of this credit.

See Nolo’s articles on “Finances and Taxes for Homeowners” for more information.