In our latest blog post, we discussed the pending fiscal cliff and how it could impact real estate. In the past few days, the expiration of the Mortgage Forgiveness Debt Relief Act and the elimination of the Mortgage Interest Deduction in particular have been in the spotlight once more and here’s why:
1. Mortgage Forgiveness Debt Relief Act: This act was passed in 2007 and prevents struggling and delinquent homeowners from having to pay taxes on any portion of their mortgage debts forgiven by a financial institution through short sales, loan modification or principal forgiveness.
Without this act in place, due to expire at the end of the year, homeowners would be required to pay income tax on the amount of debt forgiven. This would make it more difficult and expensive for these homeowners, who are already financially struggling, to accept short sales and many loan modification offers. This could have dramatic consequences, not the least of which is potentially increasing bankruptcy rates and even homelessness.
As a result, the Center for Responsible Lending, a nonprofit group dedicated to protecting homeownership, and the Financial Services Roundtable, a group of representatives from the nation’s largest financial institutions, have come together to ask Congress to extend the Mortgage Forgiveness Debt Relief Act. While the housing market nationwide is showing signs of a recovery with rising prices and increasing home sales, these two organizations have concerns that allowing this act to expire could negatively impact the market.
2. Mortgage Interest Deduction: This deduction has been a large incentive for homeowners for decades. It allows them to deduct the interest paid on the loan from their taxable income. For those who itemize their deductions, as much as 49% of the deductions are related to their home.
A recent study by the Tax Foundation, a nonpartisan research group, found that the State of Washington was the 5th highest state in the size of home mortgage deductions, with each household deducting an average of $15,502 from their taxable income. Plus, over 30% of people living in the state take the deduction (see below map) – which is a big deal for a lot of people who are trying to buckle down and save money. Not only that, but this deduction helps to incentivize homeownership in markets that have been struggling since the recession hit.
If you are interested in taking action on these issues follow this link to notify Congress yourself!