Just before Congress headed out for summer vacation this week, a Senate committee started something that’s likely to prove important to thousands of homeowners and buyers across the country: Extensions for popular but expired tax benefits for energy-efficient home improvements, mortgage-debt forgiveness, and deductions of mortgage-insurance premiums.
By a lopsided bipartisan margin, the Senate Finance Committee voted to approve the 2015 version of what has become an annual event that often carries on well into December. The issue: What to do about the tax “extenders,” a grab-bag bill that reauthorizes 50-plus tax code provisions designed to benefit special interests, including real estate. All these targeted subsidies — ranging from tax credits for research and development to favorable tax treatment for race horses and car racing tracks — are much beloved by the niche constituencies they benefit.
But they all have temporary status in the federal tax code and need to be renewed periodically or they disappear. Homeowners’ special tax deals expired last Dec. 31 and currently cannot be used by taxpayers for 2015 unless extended retroactively.
Among the key real estate provisions in the Finance Committee’s bill now heading for full Senate action this fall:
• A retroactive extension through 2016 of the mortgage debt relief law that allows owners to escape federal taxation on any loan amounts forgiven — written off — by lenders in connection with mortgage modifications, short sales and foreclosures. Without this amendment to the tax code, owners who receive debt reductions from their lenders this year would face potentially staggering tax bills. All principal amounts written off by the lender would be treated by the IRS as ordinary income, taxable at ordinary rates. The same rule generally holds for other types of debt.
Since its first enactment in 2007, this special exception — designed to help taxpayers struggling through the horrors of the housing bust — has saved tens of thousands of owners in financial distress from having to pay the IRS billions of dollars in tax levies. By extending the exception, people who receive debt cancellations this year and next on their principal homes could save a lot of money. Senate tax experts evidently expect large numbers of underwater and financially stressed owners to make use of the extension. They estimate the cost in uncollected federal revenues for the two-year extension to be $5.1 billion.
• Reauthorization of the popular tax credits for home-related energy-efficiency improvements, such as high-performance windows, insulation and appliances. This allows owners to qualify for a maximum tax credit of $500. Unlike a deduction, a credit is a direct subtraction from your bottom line tax owed. The credits are for 10 percent of the cost of purchasing energy-efficient windows (maximum credit $200), furnace or boiler (maximum credit $150) and up to $300 for other improvements, including insulation. According to estimates by the National Association of Home Builders, this extension alone is expected to save owners who are remodeling their homes nearly $700 million in federal taxes during 2015 and 2016.
• Extension of the deductibility of mortgage insurance premiums, whether for conventional private mortgage insurance or the premiums or guaranty fees paid on Federal Housing Administration (FHA) insured loans and Veterans (VA) loans and rural housing mortgages backed by the Department of Agriculture. This write-off is of special significance for first-time and middle-income buyers. That’s because it is generally restricted to taxpayers with incomes of $100,000 or less and gets phased out in graduated steps for borrowers with incomes up to $110,000.
The extenders bill also renews authority for a tax incentive widely used by new home builders that provides a $2,000 credit for construction of highly energy-efficient residences. According to industry estimates, the bill would save builders $380 million annually in taxes during 2015 and 2016.
So where’s all this headed and when? Probably there’s a slow and bumpy ride ahead, not because the extenders bill itself is controversial, but because Congress has an overloaded plate of other, weightier issues to deal with during the remaining weeks of scheduled sessions this fall. These include the federal budget, the debt ceiling, highway funding and possibly international tax reform.
Lobbyists say the House and Senate are likely to eventually agree on and approve an extenders bill in some form, but maybe not until late fall, possibly even mid-December.
That’s not guaranteed of course. Nothing is on Capitol Hill.
Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors.
