Mortgage Rates

Bill seeks to extend state tax relief for mortgage debt forgiveness – Will It Happen?

One of the near-casualties of the Fiscal Cliff earlier this year was the Mortgage Debt Forgiveness Relief Act, which expired on December 31st, 2012. However, on January 3rd, 2013, President Obama signed The American Taxpayer Relief Act, which extended the deadline of the Mortgage Debt Forgiveness Relief Act one more year to December 31st, 2013.

The Mortgage Debt Forgiveness Relief Act was originally enacted in 2007 to accommodate the rising number of homeowners who had to do short sales as a result of the housing crisis.

A short sale occurs when a lender allows the homeowner to sell their home at a price that is lower than what is owed on the mortgage. The difference between the amount owed and the sales price is “forgiven” by the lender.

As with most forms of debt relief, the amount forgiven by the lender has been historically treated as taxable income by the IRS (adding insult to injury for the home seller).

When the housing crisis began to unfold, Congress and the Legislature decided not to consider canceled housing debt as income. This applied to canceled debt from foreclosure, the refinancing of a home loan or the short sale of a primary residence up to $2 million.

The California state law providing more relief, the Mortgage Debt Forgiveness Relief Act of 2007, expired at the end of 2012. This excluded up to $500K from taxable income in the form of debt forgiveness.

In California, AB 42, a bill that seeks to extend state tax relief for mortgage debt forgiveness was presented by Assemblyman Henry Perea, D-Fresno earlier this month. AB 42 would mirror the federal law and extend state income tax relief for debt forgiveness up until the end of 2013.

The Franchise Tax Board estimated the local impact to be a $50 million reduction in state income tax for 2013.

Since California’s mortgage debt forgiveness bill could affect state revenues, the measure was set aside until further analysis could take place regarding next year’s budget projections.

Brenda Harjala is a staff writer for Optima Tax Relief. Her mission is to help consumers stay financially savvy, and save some money with tax relief.

Should the Mortgage Interest Tax Deduction Be Cut?

Via LearnVest By Alden Wicker ~

The mortgage interest deduction, which lowers the tax bill of mortgage holders, has long been seen as an incentive that helps more Americans afford homes. But is it actually working?

It’s an important question, since the government spends $108 billion a year on this one deduction. With lawmakers mulling fighting over ways to cut spending and raise revenue as the fiscal cliff approaches, it could make a juicy target.

Especially in light of the fact that the people who need the most help affording homes aren’t actually helped by this deduction. 75% of the benefit of the deduction goes to the top 20% of income earners, according to The Atlantic. People who earn over $200,000 get an average benefit of $2,221 for deducting their mortgage interest. Meanwhile, those who make under $30,000 get zero benefit. A typical household that earns between $50,000 and $70,000 gets an average of just $179 in reduced taxes.

The way it works now, the more you earn, the larger the house you can afford, the bigger the mortgage–and interest deduction–you can take. (That’s one reason this couple cites for their high taxes–they don’t own a home and don’t get the mortgage interest deduction.) Plus, you can only take the deduction if you itemize your tax return, and low earners don’t.

The mortgage interest deduction also disproportionately benefits certain metropolitan areas–San Francisco and San Jose in California, Bridgeport in Connecticut and Suffolk County-Nassau County in New York (A.K.A. Long Island) top the list of wealthy areas that rake in the mortgage deductions every year.

Given these stats, it seems like the mortgage interest deduction isn’t a way to help Americans achieve their dream of owning a home, but just another loophole that benefits the wealthy–a hot topic this year.

LearnVest is the leading lifestyle and personal finance website for women.

The post Should the Mortgage Interest Tax Deduction Be Cut? appeared first on Debt America.