Several federal tax breaks important to the real estate industry expire at the end of the year, and it remains to be seen when or if Congress will extend them.
These include the:
• PMI – a tax deduction for premiums for mortgage insurance provided by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), the Rural Housing Service and private mortgage insurance
• Short sale principal forgiveness – the exclusion from taxable income of up to $2 million of debt a lender forgives on a principal residence sold through a short sale, mortgage restructuring or foreclosure
• Residential energy improvements – the maximum lifetime tax credit of $500 for energy efficiency improvements in a principal residence
• Accelerated property deductions – The Section 179 expensing deduction, which allows small business owners to deduct business property costs in a single year rather than over several years
• Bonus depreciation rules – a tax benefit that allows businesses to deduct 50 percent of the cost of qualifying business property in a single year
• Energy-efficient commercial buildings deduction
• New home energy improvements – a $1,000 or $2,000 credit for constructing or manufacturing qualified energy-efficient homes also are slated to expire this year.
If forgiven debt is taxed this will severely slow down short sales. Let’s say you owe your lender 500k on your primary residence house. You do a short sale and after all is said and done you give them 400k. There is a 100k deficiency that you still owe them. Typically what happens is they declare this to be non recoverable which allows it to be taken a deduction on their taxes. In order to do this they must send you a 1099 for 100k. Up until the end of this year the tax man forgave the tax due on this income to you under certain circumstances. Well, It looks like that will change and the 100k of forgiven debt would be taxed as regular income.