Costa Mesa Fiscal Cliff

Costa Mesa Fiscal Cliff Update

As you know by now, we as a nation and locally in Costa Mesa avoided the worst of the Fiscal Cliff. What is imprtant to know is that there are some key provisions for us locally that help us all as Costa Mesa real estate homeowners.

I will warn you in advance, this topic is pretty dry. Ok, this topic is Sahara Desert dry, but I still need to cover it. I don’t think people realized how much it could have affected us locally with our real estate.

What’s Changed?

First and foremost, the bill includes a provision to extend the Mortgage Forgiveness Debt Relief Act, which will for one more year exempt the taxation of mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale or loan modification (including any principal reduction). While debt relief has been extended at the federal level, the California exemption expired at the end of 2012, so forgiven mortgage debt is considered taxable state income for now. That last part is trés important!! This goes back to the way it was prior and now you will receive a 1099 from a lender on income of a short sale loan.

There is a bill before the state senate now to take it back to the way it was prior – hopefully that happens.

What Else?

Here are other housing-related provisions included in the federal law that effect Costa Mesa:

The “Pease Limitations” that reduced the value of itemized deductions, including the mortgage interest deduction, are permanently repealed for most taxpayers but will be reinstituted for high-income filers. This provision reduces a taxpayer’s itemized deductions by 3 percent of the amount of his or her adjusted gross income (AGI) that exceeds the threshold amount. Under the new law, the Pease thresholds are $300,000 for married taxpayers filing jointly and $250,000 for single taxpayers (i.e., a married couple with an AGI of $400,000 would be $100,000 over the threshold; the couple’s deductions would be reduced by $3,000 which is 3% of $100,000). No matter how high a taxpayer’s AGI, the Pease reduction cannot exceed 20 percent of the amount of itemized deductions otherwise allowable for the year.
To summarize this, because it is a bit confusing: Who is affected by Pease Limitations? Individuals with more than $250,000 Adjusted Gross Income (AGI) Head of Household filers with more than $275,000 AGI. Married Couples Filing Jointly with more than $300,000 AGI
No taxpayer below these income levels will be affected by Pease.
The restoration of a tax deduction for mortgage insurance premiums, including premiums paid to the Federal Housing Administration and private mortgage insurers. This provision expired at the end of 2011 but has now been retroactively extended for all of 2012 as well as 2013. Great news for those of you who bought homes with FHA loans.
10 percent tax credit (up to $500) for homeowners for energy improvements to existing homes is extended through 2013 and made retroactive to cover 2012. Sweet!! keep going green, it pays you back in more ways than just taxes.
Capital gains rates will remain at 15 percent for those earning less than $400,000 (individual) and $450,000 (joint). Gains above those income levels will be taxed at 20 percent. Gains on the sale of principal residences will remain unchanged and continue to exclude the first $250,000 for single taxpayers and $500,000 for taxpayers filing jointly. Obviously, this will hurt some Costa Mesa investors, but for the majority of homeowners in middle-class Costa Mesa, this is great news.