Several tax laws that many have counted on are expected to expire at the end of this year. While many remain popular with public opinion and will likely be extended by Congress, there are others that are unlikely to be awarded the same courtesy. It remains to be seen, however, exactly when or how lawmakers intend to address this particular issue. Changes looming on the horizon will undoubtedly have ramifications on the housing sector and those investing in the market.
Decisions regarding tax renewal and expiration are convoluted to say the least. At the moment, no one is sure which tax proposals will transition into next year. Both Congress and White House representatives are in favor of a serious tax reform in 2014 that could overhaul the entire situation. It is unclear what taxes will look like in the upcoming year.
According to Stephen Fishman, a contributor to Inman News, “Key members of Congress and the Obama administration have proposed that extending or making permanent some of these expiring provisions be made part of the overall tax reform process instead of being done piecemeal though special tax extension legislation.”
The ambiguity of potential tax decisions in the new year may be unnerving to some, particularly those who count on respective breaks. Accordingly, real estate investors should familiarize themselves with this situation and be prepared to do without breaks that they have counted on in the past. While a decision has yet to be made, the expiring provisions of most importance to the real estate industry include:
Mortgage Insurance Premiums Deduction
Dating back to 2007, qualified homeowners have been awarded the opportunity to deduct premiums for mortgage insurance. Homeowners whose incomes are not too high can treat such payments the same as mortgage interest payments. However, if this particular tax break is not permitted in 2014, no deduction will be allowed for amounts paid or accrued after 2013.
Discharge of Indebtedness on Principal Residence Exclusion
For approximately five years, the owners of a home have been allowed to exclude up to $2 million of debt forgiven from their taxable income by a lender in a short sale, mortgage restructuring, or forgiven in a foreclosure. However, unless this tax break is permitted in 2014, the exclusion will not apply to indebtedness discharged after 2013. Real estate investors will be impacted in a variety of different ways, as each state will be different.
This is because several states have enacted anti-deficiency legislation that prevents lenders from holding a homeowner personally liable and going after his or her personal or other assets if the proceeds from a foreclosure or short sale are not enough to cover the amount of the home loan.
Tax Credit For Qualified Energy Efficiency Improvements
The instillation of energy efficient appliances and features was a major focus of the current administration. As such, a $500 tax credit was awarded to those who installed energy efficient improvements in their primary residence. However, this tax break is set to expire by the year’s end and it is unclear as to whether it will be extended.
Section 179 Expensing Deduction
The structuring of IRC Section 179 currently allows small-business owners to deduct the cost of business property in a single year instead of spreading the cost out over subsequent years. Over the past three years, small-businesses could deduct $500,000, but if the tax break is not extended, the limit is scheduled to drop significantly to $25,000 next year.
Over the last six years, businesses have been awarded the opportunity to deduct 50 percent of the cost of qualifying business property in a single year. Otherwise known as “business depreciation,” this tax break will end on December 31st if it is not extended.
Energy-Efficient Commercial Buildings Deduction
Similar to that of the Tax Credit For Qualified Energy Efficiency Improvements, this particular break impacts commercial buildings. Since 2006, commercial buildings implementing energy efficient upgrades could file for a deduction totaling $1.80 per square foot. Qualifying upgrades include, but are not limited to: lighting, heating, ventilation and hot water systems. Like the other tax breaks, this one is expected to end on December 31st.