To follow please find a simple explanation of what has been initiated by our elected officials in Washington, what is on the table in California on debt forgiveness on short sales, etc, that I recently received from Don Faught, President of the California Association of Realtors. This will help you understand all the changes that are taking place in our tax structure. Congress made permanent the repeal of the “Pease Limitations” on itemized deductions – including the mortgage interest and property tax deductions.
The American Taxpayers Relief Act of 2012 was signed into law on Jan. 2. The law 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). However, the California exemption expired at the end of 2012, so forgiven mortgage debt is considered taxable state income for now.
We recognize this could impact short sales in California, and that’s why C.A.R. is sponsoring SB 30 (Calderon, D-Montebello). SB 30 will conform state law to the federal law passed earlier. Upon passage of SB 30, the measure will be effective retroactive to Jan. 1, 2013.
Congress made permanent the repeal of the “Pease Limitations” on itemized deductions – including the mortgage interest and property tax deductions – for all taxpayers whose adjusted gross income (AGI) falls below $300,000 for married couples filing jointly and $250,000 for individuals. Pease Limitations will be reinstituted for high income filers above those threshold amounts. This means a taxpayer’s itemized
deductions will be reduced by 3 percent of the amount of his or her AGI that exceeds the threshold amount. For example, a married couple with an AGI of $400,000 would be $100,000 over the threshold; the couple’s itemized deductions would be reduced by $3,000 which is 3% of $100,000. No matter how high a taxpayer’s AGI, he or she cannot lose more than 80 percent of the total itemized deductions. Those most limited by Pease will be extremely high income filers who do not have many itemized deductions.
Again, I want to recognize and thank the tens of thousands of C.A.R. members who worked to successfully maintain the mortgage interest deduction and mortgage debt forgiveness by responding to the Calls for Action.
Just last week, the Consumer Financial Protection Bureau (CFPB) issued new rules that define a “qualified mortgage (QM),” which will protect borrowers from deceptive lending practices. The CFPB was charged with drafting and implementing the rules under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to clearly define underwriting goals and other standards that a loan must have in order to ensure the borrower has the ability to repay the loan. When lenders issue a QM mortgage, they are afforded a safe-harbor from legal liability shielding them from being sued for originating a loan they knew the borrower could not repay. The new rules go into effect Jan. 10, 2014.