Housing: How Will the Fiscal Cliff Impact My Money?

When it comes to home ownership and the recovery of the economy, how will the fiscal cliff impact my money?

If you are currently a home owner, thinking of becoming a homeowner, underwater on your mortgage, or considering selling your home in a short sale, the Fiscal Cliff will definitely affect your decisions and the outcome. The larger impacts of the Fiscal Cliff could also adversely affect our economic recovery, because of the potential effects on the housing market.

Home Mortgage Interest Deduction

One of the casualties of the Fiscal Cliff could easily be the home mortgage interest deduction. This deduction allows taxpayers who own their homes to reduce their taxable income by the amount of interest paid on the loan which is secured by their principal residence.

Why is this important? The home mortgage interest deduction has been an invaluable tax break for middle class people looking to buy homes. It has also allowed home owners to keep their homes. The loss of the home mortgage interest deduction could discourage home purchasing, just when the housing market is showing signs of healing. It would also affect home builders, construction workers and anyone else involved in the housing industry. Losing this benefit would definitely stall economic recovery for the country.

Loan Modifications

The Fiscal Cliff could also mean the end of loan modifications. Because the Mortgage Forgiveness Debt Relief Act of 2007 is set to expire on December 31, 2012 with no extension in sight, it could send many more homes into foreclosure. Basically, the Mortgage Forgiveness Debt Relief Act allows borrowers to not pay taxes on certain mortgages that have deficiency forgiven in a modification, a short sale or foreclosure. In simple terms, if you have a balance of $350,000 and you sell your property for $250,000, as of January 1st, you will be liable for for taxes on the $100,000 difference.

The immediate consequence of the end of the Mortgage Forgiveness Debt Relief Act will be less people willing to go into a short sale, because they will be faced with huge tax bills. Holding back on a short sale won’t necessarily change anything, and they will be more often than not delaying the inevitable, and instead of a short sale, could very easily end up being in a foreclosure situation. Not good for them and not good for the economy.