It was a close call for homeowners, potential buyers and mortgage borrowers. The dreaded fiscal cliff was partially averted a little after the eleventh hour, but the cliff factors that primarily affected the housing market were kept at bay by lawmakers in Congress. The housing market can now continue its gradual recovery, at least for the time being.
The fiscal cliff was not only about income taxes and payroll taxes. It was also about the fate of short sales, the mortgage interest tax deduction and mortgage insurance premiums. Analysts were understandably concerned about the negative effect that a fiscal cliff dive could have brought on the housing market in the short-term; after all, home buyers and mortgage borrowers need every incentive they can get so that they are able to participate in the housing market.
Had Congress resolved to let the fiscal cliff run its course and revert to the way things were during the Clinton administration, the immediate effect on the housing market would have been catastrophic. Short sellers would have been among the first victims. Whenever a mortgage lender agrees to a short sale, the seller is given a few major breaks. Aside from avoiding foreclosure and a deficiency judgment, the seller is also granted a tax break on the debt forgiven.
Prior to 2007, a short sale meant that the seller was on the hook for paying taxes on the amount of mortgage debt forgiven. When foreclosures started piling up in 2006, Congress quickly moved to stimulate short sales by giving sellers a tax break. Banks were slow to warm up to the idea of losing on a mortgage settlement transaction, but short sales have actually been a catalyst in the ongoing housing market recovery. Tax-free short sales may now continue for another year.
The mortgage interest tax deduction is also still in effect, but not for everyone. Homeowners who earn more than $250,000 per year on an individual basis, or more than $300,000 as a couple, may see their 2013 itemized deductions drop by $1,500 in some cases. This is one tax break that will probably not survive past 2013, but research studies leading up to the fiscal cliff deadline have shown that the mortgage interest tax deduction is mostly claimed by higher income households.