Update on Fiscal Cliff: What’s at Stake for Real Estate

Congress today (Dec. 31) continues to wrestle with what to do about the fiscal cliff, the hundreds of billions of dollars in automatic tax increases and federal spending cuts that take effect at the end of the year unless lawmakers act to avert it.

If Congress does act before midnight tonight, there are a number of things they can do. They could pass a short-term patch to get us into 2013 without major disruption to tax rates and spending programs, or they could take some large-scale action to avert the cliff and make big budgetary changes at the same time. If they don’t act by midnight tonight, and the country goes over the fiscal cliff, they could still take action early in 2013 to address tax issues and spending cuts, restoring some provisions retroactively. There are many scenarios and, as of this writing, it’s impossible to know exactly how things will play out.

Negotiations were conducted over the weekend and were expected to proceed all day today. NAR will provide an update to its members once negotiations are ended.

With this very fluid situation as a backdrop, NAR Chief Economist Lawrence Yun and NAR Director of Tax Policy Linda Goold sat down last week, on Friday, Dec. 28, for a short discussion on what real estate interests are at stake in this debate. Among other things, if no action is taken, tax rates could rise across the board to their 2003 level, before they were lowered by the Bush-era tax cuts. That means, among other things, the top tax rate could revert to 39.6 percent, from 35 percent today. Tax rates for lower income tax brackets would also rise.

The capital gains tax rate could rise as well. It’s currently at 15 percent, and it could possibly return to 20 percent. Should that happen, most home sellers should nevertheless remain protected from a tax increase upon sale of their home because the $250,000-$500,000 caital gaims tax exclusion remains in place, so only sellers whose gain is more than the exclusion amount would face the higher tax rate.

The alternative minimum tax (AMT) could change and become applicable to far more tax filers than is the case today. Goold says more than 30 million households could find themselves facing an AMT hit, up from about 4 million households today.

And mortgage cancellation relief, which helps underwater sellers who’ve had some mortgage debt forgiven by their lender, could lose that relief—at least temporarily— because it’s set to expire at the end of the year.

These are just some of the real estate impacts. In the 6-minute video above, Goold and Yun talk in more detail about what to look for should Congress end the year without taking action to avert the cliff.

To respond to NAR’s Call for Action that Congress should do no harm to real estate by considering changes to the mortgage interest deduction, either as part of the fiscal cliff discussion or as part of broader tax reform in 2013, go to www.REALTORActionCenter.com.

Earlier coverage of the fiscal cliff.

Article source: http://speakingofrealestate.blogs.realtor.org/2012/12/31/update-on-fiscal-cliff-whats-at-stake-for-real-estate/