What is the impact of the Fiscal Cliff bill on real estate?
Why was Congress not able to pass a comprehensive tax bill?
How effective was the 112th Congress regarding passed legislation?
This week there was good news and bad news regarding Congress passing the bill that prevented us from falling over the ‘fiscal cliff’. Some of the good news were the extension of key taxes relating to real estate, and the DOW Jones being up almost 300 points. There were some popping Champagne corks because of averting the draconian tax increases. But David Cote, the Honeywell International Inc. CEO who put himself in the middle of the back and forth between lawmakers and the White House, isn’t joining the party. Mr. Cote stated in an interview this week, “We shouldn’t be sitting here slapping ourselves on the back for a great job. All it did was address the ‘fiscal cliff’ problem and set us up for a debt ceiling debacle.” And, other key executives stated yesterday that Washington totally wasted an opportunity to address the nation’s long-term debt.
Their comments are about how Congress failed to tackle comprehensive tax reform or scale back federal spending. So, weeks from now, the $110 billion in spending cuts will be back on the table, at the same time the U.S. will need to boost its borrowing limit again which will be sometime in February or March. The scenario sets up another opportunity for divisiveness between lawmakers and the White House, and more uncertainty for the real estate and business communities.
- The bill passed provides an additional twelve months of tax relief for homeowners selling homes that are underwater. Before 2006 forgiven debt was considered taxable income. But in 2007, Congress exempted homeowners from treating some forgiven mortgage debt that way as part of an effort to encourage alternatives to foreclosure. Jaret Seiberg, an analyst with Guggenheim Securities observed, “An extension of the tax break is positive for home values by reducing the number of foreclosures and helping more troubled borrowers stay in their homes. That means less supply on the market.”
- The bill permanently reinstated the “Pease” provision, named after former Rep. Donald Pease (D., Ohio), which is a limitation on all itemized deductions—including charitable donations and mortgage interest—that will eliminate up to 80% of deductions for taxpayers above the thresholds $300,000 for joint tax filers and $250,000 for single tax filers. This phase out’s net effect is to add about one percentage point to the top tax rate, including the top rate on capital gains, say experts.
- The bill permanently raises rates on long-term capital gains and dividends for top-bracket taxpayers. People who owe at the 39.6% level for income tax will pay 20% on all their net long-term gains as opposed to 15% in 2012. And, the 15% rate will continue to apply to taxpayers in the 25%, 28%, 33% and 35% income tax brackets, and people in the 10% and 15% brackets will continue to have a zero rate on capital gains and dividends.
So, why Congress could not pass a comprehensive limit on long term deficits and tax overhaul be agreed upon before January 2, 2013? Here is the simple answer. Republicans want more spending cuts, and Democrats want more revenue. And there are other issues. Capital Economics observed, “Coming on the heels of the stand-off over raising the debt ceiling in mid-2011, the ill-tempered nature of the latest negotiations has confirmed that Congress is almost completely dysfunctional.” In fact, this Congress has been the most ineffective Congress in passing any meaningful legislation since the 1940’s!
1) Great news about the debt forgiveness act being extended, however this will create less homes for sale and continue a “Sellers Market” in the Bay Area - including East Bay real estate.
2) The wealthy will have limitations on how much mortgage interest deductions are available to them. And, the Mortgage Interest Deduction is expected to be back on the chopping block by May or June.
3) The wealthy will pay a 20% capital gains tax on their real estate investment properties.
Let’s hope the newly elected Congress will get to the hard work of tax reform and spending cuts. Until next time…Jim Walberg.