3 important tax breaks for homeowners expire on Dec. 31, 2013
Homeowners enjoy a number of preferences in the federal tax code. But three of those preferences expire on Dec. 31, 2013.
"There may be fewer homeowner tax breaks in 2014, unless the expiring provisions are extended," explained Mildred Carter, senior federal tax analyst at CCH Tax & Accounting, a Wolters Kluwer company in Riverwoods, Ill. "These include the itemized deduction for mortgage insurance premiums, the residential energy property credit and the exclusion from gross income for discharge of qualified principal residence indebtedness."
No more debt forgiveness
When a lender cancels a portion of a homeowner's mortgage debt, typically as part of a short sale or loan modification, the cancelled amount is treated as ordinary income for federal income tax purposes.
In 2007, federal law was changed to allow this forgiven debt to be excluded from income. The exclusion, originally for five years, was extended for an additional year. But now, homeowners who close a short sale or receive a loan modification that involves debt forgiveness will have to treat that as ordinary income subject to federal tax.
The expiration of the exclusion is "a major concern" in Las Vegas, says Paul Bell, a Realtor with Prudential Americana Group. Locally, Bell says, many homes are still put on the market because the owner owes more than the home is worth and is struggling to pay the mortgage.
Still, he adds, the tax treatment might not be the primary consideration for people who want to close a short sale.
"Nobody wants to have a foreclosure on their credit record because it can jeopardize their employment," he says. "Federal government employment and the financial industry have important standards regarding those issues."
Jan Baron, a Realtor with Realty One Group in Temecula, Calif., says fewer homeowners need to be concerned about debt forgiveness today because even if they were upside down a while ago, home prices have recovered to the level at which they can now close a so-called standard sale.
"Some people think they have to do a short sale, but their equity has come up so much that they are on the borderline and need to think through whether it makes sense to do a standard sale," she says.
Forgiven mortgage debt can be subject to state income tax as well, depending on state tax laws. Some states conform to federal law. Other don't.
Homeowners are strongly advised to consult a tax expert for more information.
Mortgage insurance deduction
Mortgage insurance typically is required when someone buys a home with a down payment that's less than 20 percent. Mortgage insurance is paid for by the homeowner to protect the lender's interest in the property if the homeowner defaults on the loan. Depending on the type of mortgage you have, your mortgage insurance premium might involve an upfront fee financed as part of the loan amount, an annual premium paid monthly with the mortgage payment or both.
Baron says buyers might assume mortgage insurance is tax-deductible, but that's no longer the case.
"They aren't aware whether it's tax deductible or not," she says.
Some buyers are making larger down payments to avoid mortgage insurance, Baron adds. No mortgage insurance means no mortgage insurance premium, making the tax issue moot.
Bell says buyers tend to be more concerned about the monthly cost of the insurance than whether that amount is tax-deductible. The cost depends in part on the type of loan the buyers choose as well as their down payment.
"Conventional financing insurance premiums appear to be coming down, but the FHA insurance premiums are up and now last throughout the lifetime of the loan," he says.
Energy-efficient tax credits
The residential energy property tax credit that expires at the end of 2013 applied to residential exterior doors and windows, insulation, heat pumps, furnaces, central air-conditioning and water heaters.
But Carter says a different residential energy-efficiency property tax credit will continue through 2016. This credit applies to solar water heaters, solar electricity equipment, fuel cell plants, and small wind energy and geothermal heat pumps and equipment that meet certain requirements.
Evan Liddiard, director of tax policy at the National Association of Realtors in Washington, D.C., says the hope is that Congress will extend all of these expired provisions in 2014.
That could happen, but homeowners shouldn't count on it.
Marcie Geffner is an award-winning freelance reporter, writer, editor and blogger whose work has been published by MSNBC, CNBC, Yahoo! Finance, Fox Business, Bankrate.com, AOL Real Estate, ThirdAge.com, Fidelity.com, Inman News and dozens of major U.S. newspapers. She holds a bachelor's degree in English from UCLA and MBA from Pepperdine University. You can follow Marcie on Twitter: @marciegeff.
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