If you've been waiting on the sidelines to purchase a home or put yours on the market because of the sluggish economy of the past few years, the time for action may have finally arrived. The American Taxpayer Relief Act of 2012, the law that addressed “fiscal cliff” issues, helped to clarify several home sale and purchase questions. The Pennsylvania Institute of Certified Public Accountants (PICPA) offers perspective on provisions of the act that relate to the real estate market and on other things to consider when making your decision.
The Mortgage Deduction Endures
During the final fiscal cliff negotiations in Washington at the end of last year, some economic watchers were concerned about whether or not home owners would continue to be allowed to deduct mortgage interest from their taxable income. The new law does not eliminate that deduction, and that’s a positive development for home owners because the tax bite could have been significant. At the same time, many aspiring first-time homeowners might have found it hard to afford mortgage costs without this deduction. The final deal also preserved the deduction for the cost of private mortgage insurance, which is used by buyers who are making less than a 20 percent down payment. Loss of either of these deductions could have made waves in the market for both buyers and sellers.
Short Sales Are Still on the Table
The new law gives a one-year reprieve to homeowners whose homes are “underwater,” which is when a mortgage is greater than the current value of the home. Under a previous tax rule, homeowners who receive loan modifications or engage in short sales did not have to pay taxes on that debt relief, but that provision expired at the end of 2012. The new law extends that relief for one year, adding some stability to the real estate market and potentially making it easier for struggling homeowners to hold on to their properties and avoid going directly into foreclosure.
Have Your Finances in Order
When it comes to home ownership, knowing you’re taking the right step involves ensuring that you have the right budget for the property you’re considering. As a general rule, mortgage costs—including your mortgage principal and interest, as well as taxes, insurance, and related monthly fees—shouldn't add up to more than 30 percent of your income. You should also determine if there are any problems with your credit score or history that might prevent you from getting a loan. As part of the process, you may want to contact a lender to get prequalified for a mortgage amount so you have a realistic sense of what you will be able to borrow. When you research neighborhoods, remember that good school systems can help keep home prices strong, so find out about the quality of the school district even if you don’t have kids.
Talk to Your Local CPA
Both buyers and sellers should keep in mind that there is still a great deal of uncertainty in the housing market. When contemplating any significant financial step, remember that it’s always a good idea to review your financial position to determine if it’s the right thing to do. Before you take this big step, consult your local CPA. He or she can offer advice on taxes and other issues related to home ownership, and provide information and insights on all your financial concerns.
To find a CPA in Pennsylvania by location or area of expertise, ask your family and friends for recommendations or use the PICPA CPA Locator