The combination of higher taxes and automatic budget cuts has been called the “fiscal cliff.” Three hours before the midnight deadline on January 1, the Senate agreed to a deal to avert the fiscal cliff. Even though averted, more remains to be done. Congress will have another two months before having to make a decision on how to cut the federal budget.
How do we stand as of now? Here’s an outline from the current bill explaining how it affects the real estate market and what it means for 2013:
1. CAPITAL GAINS
Capital gains and dividends rose from 15% to 20% for taxpayers above the top income tax bracket. The 15% rate remains for taxpayers in the middle brackets and the 0% rate remains for taxpayers in the 10% and 15% brackets. Please keep in mind, the exclusion of $250,000 for singles and $500,000 for married couples is still in place, so as long as you’ve owned your home for at least 2 years and your gains are less than the preciously mentioned amounts, this increase won’t affect your sale. Dividends for Real Estate Investment Trusts (REIT), will be affected by the increase, potentially decreasing the value of large apartment complexes, office buildings and commercial buildings.
2. The Mortgage Forgiveness Debt Relief Act
The Mortgage Forgiveness Debt Relief Act has been given a one year extension through 2013. This is a huge relief for sellers in the short sale process. Because of this homeowners who sell their primary residence in a short sale or lose their home to foreclosure will not have the added burden and stress not only losing their home but then having to pay taxes on the loss up to $2 million ($1 million if married filing separately).
3. ESTATE TAX
The Estate Tax will also increase. Previously, the exemption was $5.125 million per person at a rate of 35% for any in excess. If we fell off the so-called fiscal cliff, the exemption would drop to $1,000,000 and increase to a rate to 55% – not good for a sizable number of families across the nation. With the bill passed, the exemption will be set to $5 million at a rate of 40% for any in excess.
When buying energy-efficient appliances, energy-efficient existing and new homes, you will earn a credit back for your purchase. This credit will not only encourage people to live more eco-friendly, but also provide a good incentive for people to buy qualified energy efficient homes and appliances.
Deduction for mortgage insurance premiums for qualified residences is treated as interest and is extended through 2013.
Deductions have been capped for singles making more than $250,000 and couples making more than $300,000. If you fall into this bracket, you’ll have a limit on the amount you can deduct on your taxes. This includes mortgage interest deductions, depreciation and other investment property deductions. This will not affect most American families, but can affect people with jumbo loans as well as investors who have sizable loan interest to deduct and properties to depreciate.
6. INCOME TAXES
Income taxes increase for earners of more than $450,000 for singles and $500,000 for couples. The increase will be from 35% to 39.6%. This could negatively affect higher end real estate by drying up a pool of potential buyers, but any effects would be minimal.
Please keep in mind, this situation is still on rocky ground. Discussions will be on going for at least the next few months. The automatic spending cuts going into place at the end of February have not been addressed, nor has a solution been made for the situation the debt ceiling will impose.
Please do not hesitate to contact me for any real estate questions you may have. For financial advice please consult with your financial professional.
Thanks for reading,