For the last few months, you have probably been reading and hearing all about the fiscal cliff crisis and what would/could have happened had it not been averted. The economically disastrous tax hikes and spending reductions scheduled to begin in 2013 have been avoided for now, and that’s good news for home buyers. However, with the fiscal cliff crisis averted, now questions arise regarding how avoiding this particular economic crisis will impact the housing market in Washington and nationwide.
The Gist of the Budget Package
The budget package passed by Congress on January 1, 2013 has these two primary implications for homeowners: tax rates will remain the same for most households and there’s an extension of mortgage cancellation relief.
The “American Taxpayer Relief Act of 2012” (H.R. 8) extends the current tax rates for households that earn less than $450,000 and $400,000 for those who file individually. Households that earn more than that amount will see tax rates rise to where they were back in 2003, meaning taxpayers in the highest bracket would pay taxes on ordinary income at a rate of 39.6%, up from 35%. Additionally, the tax rate on capital gains will remain the same—15% for most households and 20% for households earning in the $400,000-450,000 range.
Good news for homeowners is that “extenders” (measures that keep expiring tax provisions in place) are also part of the post fiscal cliff crisis plan. The “American Taxpayer Relief Act of 2012” extends mortgage cancellation relief for buyers or sellers who have some portion of their debt forgiven by a lender. Without a mortgage extension, the forgiven debt would be taxable only making things worse for homeowners who are already having difficulty. Another important tax consideration for buyers and sellers is that deductions for state and local property taxes and mortgage insurance premiums are also extended.
What Washington (and Nationwide) Homeowners Can Expect
In its article, Eye on Housing, The National Association of Home Builders (NAHB) has provided the following list of “American Tax Payer Relief Act of 2012” provisions. Some of the items are verbatim and others have been paraphrased:
- Extends mortgage debt tax relief through the end of the year, which prevents tax liability from many short sales or mitigation workouts involving forgiven, deferred or canceled mortgage debt
- Deduction for mortgage insurance extended through the end of 2013, reducing the cost of buying a home when paying PMI (private mortgage insurance) or insurance for a Federal Housing Administration FHA or VA (Department of Veterans Affairs) mortgage; AGI (Adjusted Gross Income) phaseout remains
- Extends the section 25C energy-efficient tax credit for existing homes through the end of 2013; the lifetime cap remains at $500
- Reinstates the Pease/Personal Exemption phaseouts for deductions. Married taxpayers with adjusted gross incomes above $300,000 ($250,000 single), the Pease limitation reduces total itemized deductions by 3% for the dollar amount of AGI above the thresholds. For high cost areas, this is a small negative impact.
Prospects for Seattle Housing Market
One piece of really good news is that homeowners’ equity is growing significantly after five years of declines. In the last quarter of 2011, after hitting a low of $6.45 trillion, Americans’ combined home equity jumped all the way to $7.71 trillion, which is a 20% gain according to a report released by the Federal Reserve in December 2012. So, what does this mean for you? A homeowner’s equity is the difference between the market value of the house and the amount of mortgage debt it’s carrying. So if your home would sell for $600,000 and your mortgage balance is $400,000 your equity is $200,000. Equity is a crucial measure of wealth and is often the only item on a financial balance sheet; the Federal Reserve tracks the estimated equity of millions of homeowners to calculate its quarterly numbers.
After reading this tidbit, you’ll clearly see why it’s so important: Just six years ago, in 2007, homeowners’ collective equity exceeded $10 trillion, and between 2007 and 2011, homeowners lost just under $4 trillion in real estate. So, the $1.3 trillion turnaround during the first three quarters of 2012 was very significant because it indicated the first rebound in the prices of homes in many local markets. And even if you currently have negative equity, with continued payment of your mortgage’s principal and appreciation in your area, your equity status has likely improved.
If you’re thinking about buying a home or want to sell, family-owned Seattle mortgage lending company, Sammamish Mortgage, has been serving the Pacific Northwest for over two decades now. Please contact us by calling (425) 401-8787, or fill out our online form to express interest in speaking to one of our professional, friendly team members.