Tax breaks head to lame-duck Congress
WASHINGTON — The congressional lame-duck session beginning Nov. 13 is expected to answer what's estimated to be a multibillion-dollar question for housing: Will Congress renew the mortgage debt forgiveness tax provisions for owners whose mortgage lenders agree to write off portions of their debt, either as part of loan modifications, foreclosures, short sales or deeds-in-lieu of foreclosure? Without an extension, borrowers who receive reductions in principal next year would be hit with federal income taxes at their regular marginal rates on the amounts forgiven.
The session also will have to deal with other real estate-related issues including write-offs for mortgage insurance premiums, tax benefits for homeowners who install energy-saving improvements, tax credits for builders of energy-efficient houses, and extension of relief for middle-income taxpayers from the alternative minimum tax (AMT), among others.
Staffs of key House and Senate tax and finance committees have been working out game plans for the session. One key piece of strategy: Could the Family and Business Tax Cut Certainty Act of 2012 — which passed the Senate Finance Committee in August and includes mortgage forgiveness relief and other housing-related tax extensions along with AMT relief, research and development tax credits and dozens of other tax benefits — be treated as a stand-alone bill? If not, there's a risk of it getting caught up in the much larger partisan fights over spending, the federal debt ceiling and the fiscal cliff debate.
Senate Democrats reportedly were ready to bring the bill to the floor for a vote before the recess, but it never happened. Now, its fate appears to be up in the air and House leaders may create their own version.
Here's some of what's at stake for homeowners:
Mortgage debt tax relief. Besides the Senate Finance Committee's bill awaiting action, there are at least four bills that have been introduced in the House that would extend the law. Rep. James McDermott, D-Wash., is sponsoring a bill that would extend the mortgage forgiveness relief through 2015. Rep. Charles Rangel, D-N.Y., wants to extend it through 2014. Rep. Dan Lungren, R-Calif., is pushing for a three-year extension, and Rep. Tom Reed, R-N.Y., favors a one-year extension, through 2013.
The fact that there is bipartisan support in the House for an extension increases the odds that mortgage forgiveness tax relief in some form will pass. The main obstacle: revenue cost to the federal government. Congressional tax experts estimate that a one-year extension would cost the Treasury $1.3 billion over 10 years.
Mortgage insurance premium deductions. Under tax code provisions that expired in December, buyers and refinancers who pay mortgage insurance premiums could write them off subject to household income limitations. The Senate Finance Committee bill would reauthorize these deductions retroactively to Jan. 1, and extend them through the end of 2013. Since this would cost the government an estimated $1.3 billion over 10 years and has not attracted as intensive a lobbying effort as mortgage debt forgiveness, it may be more vulnerable if negotiators are looking for ways to boost revenues to pay for other cuts or extensions.
Energy-efficiency improvements to homes. The Senate Finance Committee-passed bill would extend for two years — through 2013 — tax credits for installation of energy-conserving improvements. The Senate's bill would also extend credits available to builders of energy-efficient homes. These have a reasonable shot at extension, given strong support from homebuilders and product manufacturers.