Great summary of the latest legislative actions from John. Tax considerations should not be the driver of your decisions as they can change too often, but you should always stay on top of the latest updates to understand your choices and their impacts.
HR 5771 - Good News for Home Owners
HR 5771 just passed through the Senate and was already approved by the House. With a penstroke by the President it will be official. At this point that's a formality. While there are quite a few things included in HR 5771, there are 2 areas of interest for home owners - the extension of debt forgiveness through 2014, and the PMI tax deduction.
HR 5771 gives many home owners who had to go through a short sale or foreclosure on their primary residence in 2014 tax relief. Typically, if a property is lost and the bank recoups less than the balance of a mortgage, the IRS considers the difference in funds to be taxable income. This can be a huge burden on someone who has just lost their home. HR 5771 extends the Debt Forgiveness Act through 2014, so people who did lose their homes in the past year can at least breathe a sigh of relief that they won't encounter a huge tax bill because of it.
This one is nice as PMI costs have skyrocketed, especially with the FHA program. Through 2013, PMI was tax deductible, which made it at least a little bit easier to stomach. With increased costs AND the lost deduction for 2014, PMI was really a terrible thing to have on a mortgage. HR 5771 allows for a PMI deduction to 2014 taxes to borrowers who have an adjusted gross income of less than $100,000. For those with an adjusted gross income between $100,000 and $109,000 there is a reduced tax break available.
Depending on the amount of PMI this can save homeowners hundreds, or even thousands since PMI premiums can be so pricey.
The bad news?
Of course, there's always bad news, we're talking about our elected officials here! HR 5771 doesn't address 2015, so struggling homeowners in limbo will still need to hold their breath to see if debt forgiveness will be extended yet again for next year. PMI may, or may not, end up being offered a deduction for 2015, so it makes deciding whether to obtain a loan with PMI or not a tougher decision.
My advice is to use an LPMI product if possible, put enough money down to avoid PMI, or use a portfolio lender that doesn't require PMI (these lenders usually require 10%+ as a down payment).
It would be nice to see congress extend these items for a more definitive period so home owners and those considering a home purchase didn't have to deal with so much uncertainty, but then again, at least with debt forgiveness, an extension could have unintended consequences. At least regarding PMI, the deduction should be permanent - this would give more incentive to home buyers to make a purchase sooner than later, and increase the benefit of ownership even more. One miracle at a time, I suppose...
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