What Does the Fiscal Cliff Deal Mean fo VA Borrowers?

After months of debate and political jousting, the fiscal cliff debate has now ended, and the results look like this.

First, from a real estate and mortgage perspective, VA and military families did well. Second, the debates aren’t over.

brick house with American flag on front porch

After months of debate and political jousting, the fiscal cliff debate has now ended, and the results look like this.

For the typical household with a VA loan, the debate results found in the American Taxpayer Relief Act of 2012 (H.R. 8) look like this:

The Mortgage Interest Deduction

The mortgage interest deduction – arguably the most popular household write-off – remains in place. You can write off mortgage interest on debt worth $1 million plus $100,000 for a home equity line of credit.

But, maybe not. If you make $250,000 a year ($300,000 if filing jointly) then your ability to write off deductions is restricted under a complicated formula called the “Pease Limitation.”

Mortgage Insurance Premium Write-off

The ability to deduct mortgage insurance costs such as the VA’s up-front funding fee has been continued through 2013.

But, maybe not. The full deduction applies only to households reporting adjusted gross incomes of incomes of less than $110,000.

Mortgage Debt Forgiveness

The Mortgage Forgiveness Debt Relief Act of 2007 was supposed to expire at the end of 2012 but has now been continued through January 1, 2014. Under this law an unpaid mortgage balance generally cannot be taxed as regular income as it was under the old system. In other words, if you owe $150,000, have a short sale or foreclosure and the lender only recovers $125,000 it used to be that the unpaid $25,000 was regarded as “imputed” income and subject to federal income taxes. This policy ended under the 2007 debt relief act but would have been back in force if the legislation was not continued.

But, maybe not. According to the IRS not all canceled debt is forgivable because only “up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).”

Capital Gains

Profits from the sale of a prime residence – as much as $250,000 if single and $500,000 if filing jointly – continue to be excluded from taxation. Note that there are special rules which may allow individuals with qualified extended duty to extend their eligibility for the capital gains write-off of a prime residence.

But, maybe not. The capital gains rate jumps to 20 percent for those who earn $400,000 a year ($450,000 if filing jointly).

Estate Tax

The estate tax jumps from 35 percent to 40 percent.

But, maybe not. The estate tax, says the National Association of Realtors, only applies to estate valued at more than $5 million for individuals and $10 million for family estates.

Generally the effect of the fiscal cliff legislation has been to keep tax breaks for low and moderate-income households and raise tax levels for those in the higher-brackets. However, one byproduct of this process is that the rules have been changed in complex and mysterious ways. Consider having your returns run through a good tax software program or reviewed with care by a tax professional.

Photo courtesy Ken Ratcliff