The California real estate market can finally breathe a sigh of relief over news of new tax concessions that will avert going over the fiscal cliff. As a result of the fiscal cliff deal, California homeowners and investors can look forward to the continuation of several popular real estate deductions. Many economists lobbied for the extension of certain deductions and tax holidays as a method of averting the fiscal cliff, which was purported to have the potential to push the country into another recession.The prominent immediate concern for California’s housing market was the effect of downward pressure that going over the cliff might have on housing prices. According to Kenneth Harney, “Any significant reductions in long-established tax benefits would inevitably trigger declines in home values.”
Economist Lawrence Yun of the National Association of Realtors warned that prices were certain to fall as much as 15% simply due to buyers discounting their purchase offers to counterbalance losses in write-offs for things like mortgage insurance and local property taxes. California homeowners are no doubt familiar with the mortgage interest deduction, which was created solely to encourage homeownership. The fiscal cliff forced California’s housing economists to consider what the market would be like if such incentives were removed. The loss of such incentives was widely predicted to precipitate severe damage to the recovery of the California Housing market in terms of prices first and foremost.
One of the more important factors in the deal was the American Taxpayer Relief Act of 2012, which originally extended tax breaks scheduled to end in 2011. It now extends certain tax breaks for California property owners through 2013. This act - which is one among several that were negotiated to avoid the fiscal cliff – will allow California homeowners who make less than $100,000 to write off 100% of their mortgage insurance premiums. California homeowners who make more than $100,000 will also receive a write-off, but on a sliding scale. California property owners will also be delighted to know that the Relief Act applies to both private and FHA insurance.
California homeowners who have received debt forgiveness in 2012 in some form were no doubt riveted to fiscal cliff developments regarding the Mortgage Forgiveness Debt Relief Act of 2007, originally set to expire at year-end 2012. Due to Congress’ New Year’s Day fiscal cliff concessions, California homeowners who have gotten a principal reduction or short sale will move into 2013 with one less worry. The Mortgage Forgiveness Act will extend the exemption for California homeowners from paying taxes on the debt they have been forgiven through a principal reduction or short sale. According to Compass Research, in order to qualify for forgiveness up to two million dollars, California homeowners only have to show that the debt in question was “created to buy, build or substantially improve their primary residence.”
With these concessions in place, the recovery of California housing stands to receive a push in momentum. There are winners on both sides, whether that’s lenders and mortgage insurers or buyers and investors. The fiscal cliff deal is starting the year off with a brighter outlook for many California homeowners, and somewhat less uncertainty for the future of California’s housing market.