If you've been waiting on the sidelines to purchase a home, or to put yours on the market, has the time for action finally arrived? The American Taxpayer Relief Act of 2012, the law that addressed fiscal cliff issues, helped clarify some of the answers to that question.
The California Society of CPAs (calcpa.org) 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
The final negotiations in Congress at the end of last year answered several important questions, including whether 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 homeowners because their tax bite could have expanded significantly otherwise.
At the same time, many aspiring first-time homeowners might have found it harder to afford mortgage costs without this deduction. In addition, 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 some waves in the market for both buyers and sellers.
Short Sales Are Still on the Table
The new law gave a one-year reprieve to homeowners whose homes are "underwater," those whose mortgage is greater than the current value of their home. Under a previous tax rule, homeowners who received loan modifications or engaged 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 extended 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.
Both buyers and sellers should keep in mind that there is still a great deal of uncertainty about the economy, which can have a major impact on the home 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. Be sure to turn to your CPA for help with this process.
Have Your Finances in Order
When it comes to homeownership, 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 not only your mortgage principal and interest but also 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 also want to contact a lender and get pre-qualified for a mortgage amount so that 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
The decision to buy or sell a home is a significant one. Before you take this big step, consult your local CPA. He or she can offer advice on the tax and other issues related to homeownership and provide information and insights on all your financial concerns.
Copyright 2013 American Institute of Certified Public Accountants.
[The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession's nationwide 360 Degrees of Financial Literacy program. To listen to podcasts with more financial tips, go to http://tinyurl.com/calcpafinem.]