The housing crisis has a silver lining: It brought tax relief to many homeowners.
Over the last few years, lawmakers have created new home-related tax laws and tweaked existing ones to give beleaguered homeowners some relief at filing time. Even non-property owners who aren't in financial straits get some breaks, such as help in buying a first home.
And some homeowners have more options when it comes to selling. Plus tax breaks for energy-efficient home improvements also made it back onto the books.
But not all the changes help homeowners save money. The law affecting vacation-home sales was designed to put a bit more cash into the U.S. Treasury. This new tax money source was created primarily to pay for other home-related tax breaks.
As with most taxes, whether the residential tax law changes will help or hurt you depends upon your individual circumstances. Check out these seven recent real-estate-related tax measures to gauge their possible effects, for good or ill, on you.
7 new homeowner tax laws
- Cancellation of debt income
- First-home buyer credit
- PMI deduction
- Property tax addition to standard deduction
- Surviving spouse home sale tax exclusion
- Energy-saving home improvements
- Second-home sale limits
1. Cancellation of debt incomeOne of the first housing-related tax relief measures was the Mortgage Forgiveness Debt Relief Act of 2007. Enacted on Dec. 20, 2007, the law's main provision allows taxpayers to exclude debt forgiven on their principal residence when the mortgage is restructured or the property goes into foreclosure.
This law was sparked by the rapid escalation of foreclosures that year. In addition, many other homeowners discovered that their home's declining values left them upside down; that is, they owed more on their mortgages than their properties were worth.
Previously in these cases, when a homeowner renegotiated a home loan and convinced the lender to reduce the amount of principal owed, the homeowner owed taxes on the amount of forgiven mortgage debt. A similar canceled debt situation occurred in foreclosure situations.
So that these financially strapped homeowners wouldn't face taxes on top of their property debt problems, the 2007 law enables them to exclude the mortgage debt from their taxable income. Up to $2 million in forgiven debt is now untaxed.
As the scope of the housing crisis expanded, Congress modified the original debt forgiveness law. The latest change came in the Emergency Economic Stabilization Act, the bailout bill enacted in October 2008. Now, mortgage loan debt canceled in 2007 through 2012 is not taxed.
Your lender should send you a Form 1099-C, Cancellation of Debt, showing any forgiven debt. You need to report the eligible canceled mortgage debt on Form 982 and send it in with your personal tax return.