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Two mortgage tax deductions may be in danger

The 30-year fixed and 15-year fixed mortgage rates improved slightly from last week, but most programs on our 10-loan rate tracker showed little movement. For the complete set of rates, see HERE. We keep the rate news to a minimum this week to give us room to discuss two mortgage tax deductions that may be in jeopardy for the coming election cycle. We have reprinted sections from our October 15 article: “Attention Homeowners: Two Mortgage Tax Deductions at Risk.”

Taxation, regulation, and the 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 effected homeowners, and – in the case of the Mortgage Forgiveness Debt Relief Act – hurt the short sale market.

Recently, presidential candidate Mitt Romney addressed speculation that his tax clan would close the mortgage interest tax deduction, telling CNN’s Wolf Blitzer that he would give “preference” to the popular programs, especially for the middle class. The loophole is expected to give homeowners $84 billion of deductions in 2012, and we don’t expect this to be challenged.

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. With the expiration of the Bush-era tax cuts on December 31, 2012, this program will vanish unless Congress can put together an extension.

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. 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. Homeowners benefitting from principal reduction programs will also receive higher tax payments under such a situation.

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

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile
805.543.LOAN info@centralcoastlending.com